>GUJARAT NRE COKE LIMITED (RELIANCE MONEY)

Price Target Achieved:
Gujarat NRE coke has appreciated by about 54% since our last recommendation dated Apr. 15, 2009 (quarterly pre-view) wherein we had recommended a Buy with a price target of Rs 41 looking at the expected mismatch in the domestic coke market. Gujarat NRE being the largest private sector player in the Low Ash Metallurgical Coke (LAMC) would be the direct beneficiary of all the positive developments in the coke and Steel industry.

Well poised to weather the storm ………
Equipped with upcoming green field capacity, Gujarat NRE coke is braving the slowdown in the Steel Industry- the principal consumer of coke. Gujarat NRE coke is adding up 0.25 mmT of capacity which is ready in times of falling Global Steel production and prices but relatively stable production and prices in India. Gujarat NRE Coke is the largest independent coke manufacturer that owns coking coal mines in Australia. With backward integration, Gujarat NRE is assured of the raw material it requires for making of Low Ash Metallurgical Coke (LAM Coke), thus controlling its costs.

Enhanced backward integration to favour the company:
Currently, Gujarat NRE Ltd. is sourcing about 30% of its raw material from its own Australian mines and rest from the spot market. With enhanced production from the Australian mines, the Guj. NRE Ltd. expects to meet its 100% requirement by FY2011. This will help the Indian operations to be secured on raw material front in scenario of volatile coking coal market though at the annual bench mark contract rates.

Gujarat NRE to benefit from demand- supply mismatch:
A wide gap of approx. 26 mmT of coke is existent in the Indian coke market, which will be benefiting Gujarat NRE coke. Coke being an essential input for Steel making through blast furnace route, the suspension of production cuts will keep the demand intact in the Indian market. With increased capacity of 0.25 mmT coming in June.’09, Gujarat NRE will enjoy the economies of scale vis-à-vis its competitors. It has also embarked on the expansion of its capacity by another 1 mmT expected to be commissioned by FY2011.

Valuation
At CMP of Rs 42, the stock quotes at an EV/EBIDTA of 2.5x for FY2011E earnings. The coke prices are expected to be stable with upward bias. LAM Coke being a critical input the Steel making process through blast furnace route and the supply being restricted due to limited availability of coking coal, the down side for the coke prices is limited. Secondly, the fortunes of coke- making industry are hinged upon that of Steel making industry- the latter lifting 90% of the production. With stability seen resuming in Steel making industry, the coke prices are expected to be robust, though it may not reach the highs scaled in CY2008. At CMP of around $395 per tonne we are of the belief that the coke is rightly priced. Hence, we advise our clients to book profits in the
stock and re-enter at lower levels although we have positive outlook on the sector and the company as a whole.

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