Gujarat Mineral Development Corporation Ltd. share price target

Gujarat Mineral Development Corporation (GMDC) in Q1FY20 has posted 26.2% decline in its sales volume of lignite to 2.293 Mn as against 3.107 Mn in Q1FY19 on YoY basis.

Gujarat Mineral Development Corporation Limited has posted stronger set of standalone numbers for Q4FY19 on the back of 26% rise in volume to 2.66 Mn tonnes as against 2.104 Mn tonnes in previous quarter.

Weaker Quarter; Better Realization to Drive the Growth: GMDC Ltd. has posted weak result for Q2FY19 wherein sales at Rs. 2940 Mn hasde-grown by 54.4% on QoQ and 15.0% on YoY basis as against our estimates of 34.3% de-growth on QoQ and 23.0% growth on YoY basis.

Robust Demand for Lignite is in Place: Continuing with its good operating performance, GMDC in Q1FY19 reported operating numbers which are broadly in line with our estimates. The company posted revenue of Rs. 6448 Mn which is up by 11% (vs. our estimate of 13% ) on YoY basis as against Q1FY18.

GMDC on Strong Earning Trajectory: GMDC has reported 38.5% growth in production of lignite to 10.60 Mn MTs in FY18 as against 7.65 Mn MTs in FY17 on the back of strong demand. Revenue from lignite sales grew by 36.4% over the same period.

Our SoTP value of Rs 210/sh (see inside) is based on 6.5x Mar 20E EBITDA. GMDCs 4QFY18 numbers were strong with revenues at Rs 20.7bn (16.8% YoY) and adj. EBITDA of Rs 1.98bn (33.1% YoY). Reported nos. were hit by (1) Salary arrears and gratuity provision of Rs 631mn, and (2) Change in depreciation method on power assets (Rs 623mn). 4Q volumes were strong (3.4 mt, 27% YoY/QoQ). APAT rose 51.8% YoY to Rs 1.37bn.

Reduced Tax Incidence: Igniting Lignite Demand: The company reported an impressive performance in Q3FY18, wherein top line grewby 33.1%, while bottom line grew at 68.8% on YoY basis. Good showing has been an outcome of lignite becoming price competitive to coal following fixation of GST rate of 5% for lignite and other minerals.

Continuance of superior performance: GMDC has posted strong set of operating numbers during Q2FY18 and half year ended on Sept 30, 2017. The standalone revenue for Q2FY18 came in at Rs.3457 Mn as against Rs.2477 Mn in Q2FY18, registering growth of 39.6% YoY basis.

Maintain BUY with a TP of Rs 216 (6.5x Sep 19 EV/EBITDA). Our TP implies a valuation of Rs 15/61 mn/MW for thermal/wind assets. GMDC 2QFY18 numbers were ahead of estimates (EBITDA: Rs 1.01bn, 53.3/(45.0)% YoY/QoQ, Est 714mn), mainly due to higher realisations at Mata-no-Madh which saw pricing improve sharply (Rs1,975/t, 21.9/46.5% YoY/QoQ). Power division delivered EBITDA/kWh of Rs 1.53 (13.2/23.2% YoY/QoQ) mainly due to higher proportion of wind in the mix.

Maintain BUY with a TP of Rs 190 (6.5x June 19 EV/EBITDA). Our TP implies a valuation of Rs 15/48 mn/MW for thermal/wind assets. GMDC numbers were inline with estimates (EBITDA: Rs 1.83bn, 31.7/23.4% YoY/QoQ, Est 1.79bn). This was driven by strong lignite volumes (2.82 mT, up 35% YoY). Mata-No-Madh (Kutch) delivered the bulk of this jump (0.96 mT, 3.0x YoY), while the other mines also pitched in to offset lower volumes from Panandhro.

Remarkable Operating Performance Brightens Future Growth Prospects:GMDC has posted a very encouraging set of numbers at both sales and operating levels. The revenue from operations for Q1FY18 came at Rs.5831 Mn as against Rs.4104 Mn of Q1FY17 and Rs.5439 Mn of Q4FY17 thereby demonstratinggrowth of 42.1% on YoY basis and 7.2% on QoQ basis respectively. EBITDA of the company in Q1FY18 stood at Rs.1833 Mn which grew by 31.7% YoY basis and 23.4% on QoQ basis; in the process EBITDA margin deteriorated by 246 bps on YoYbasis but improved by 412 bps on QoQ basis.

Excellent Numbers on Mining and Power Fronts: Gujarat MineralDevelopment Corporation (GMDC) has posted standalone revenue from operations of Rs.5439Mn in Q4FY17 as against Rs.3594 Mn in corresponding quarter of FY16thereby recording sharp YoY growth of 51.4%. Such a great showing in revenue has been an outcome of sharp rise in income from Mining and Power segments whichregistered growth of 63.3% and 17.5% respectively on YoY basis.

GMDC numbers were ahead of estimates (EBITDA: Rs 1.48bn vs est Rs 1.03bn, ~2x YoY). This was driven mainly by lower mining costs (Rs471/t, 13.5% YoY, -33.6% QoQ), partly due to Panandhro returning to production. We expect mining costs to harden going ahead since Panandhro will likely not contribute beyond 1HFY18. Strong production volumes (2.6 mTPA, 30.8% YoY) were in line vs estimates.

Robust Financial Performance Amidst Improved Macro Economic Environment: Government's Thrust on Infrastructure and Manufacturing to Propel Growth Momentum: Gujarat Mineral Development Corporation (GMDC) has delivered encouraging result wherein its sales in value terms in Q3FY17 has grown toRs.3803 Mn from Rs.2657 Mn, posting 43.1% YoY growth as against corresponding quarter of FY16.

GMDC?s numbers were below expectations (EBITDA: Rs 662 mn vs est 782 mn, 4.5% YoY, Flat QoQ). However, there are several positives like a) strong volumes (1.84 mT, 6.8% YoY) despite the absence of Panandhro; b) better pricing due to improved proportion of large consumers (charged 4-5% higher) and c) significant scale-up in Kutch mines (Mata-no-madh, Umarsar). This was offset by higher mining costs due to nil volumes from low-cost Panandhro and higher volumes from high-cost Rajpardi mine.

GMDC has posted a net profit of Rs.729 Mn for Q2FY17 as against Rs.662 Mn during the same quarter period of FY16 thereby registering 10.1% growth. However, top line is down by 2.4% from Rs.2538 Mn in Q2FY16 to Rs.2477 Mn due to competition from cheaper imported coal. EBITDA has also contracted by 151 bps from Rs.711 Mn in Q2FY16 to Rs.657Mn during Q2FY17. The Mining revenues of the company have fallen by 2.2% while Power business has grown by 25.7% YoY basis. However, top line, bottom-line and EBITDA declined by 39.6%, 36.5% and 52.8% on QoQ basis in Q2FY17, respectively as against the performance of Q1FY17.

GMDCs numbers were below expectations (EBITDA: Rs 657 mn vs est 798 mn, -7.8% YoY, -52.8% QoQ), primarily dragged down by higher direct mining costs (42.9% YoY, 39.5% QoQ, per tonne basis) and lower volumes (1.1 mT, -23.1% YoY). Power volumes dragged (470 mn kWh, -31.6% YoY, 1.6% QoQ) too.

BUY Gujarat Mineral Development Corporation Ltd (GMDC) at CMP Rs. 97 and add on Dips to band Rs. 83-87 for the sequential targets Rs. 113-124.

GMDC has seen its lignite volume taper off in the past few years. Decline in international coal prices and heavy state taxation further weighed on lignite pricing. We expect lignite volumes to be close to bottoming out, while strengthening international coal prices and GST led normalization in taxation should help support lignite pricing and profitability.HDFC Securities initiate with a BUY and a TP of Rs 125 (5.0x FY18 EV/EBITDA).

Valuation and view: With repeated disappointments on volume front weighing it down, GMDC trades at inexpensive valuations (3.6/2.9x FY17/18 EV/EBITDA and 10-11 P/E). Despite excess cash, payouts have been dismal. Higher payouts/buybacks, in line with other PSUs, should help rerate the valuations further.