>GMDC

Growth oriented miner having (L)ignite…


We expect Gujarat Mineral Development Corporation (GMDC) to continue on its strong growth trajectory and achieve lignite sales volume CAGR of 10.7% during FY12- 15E. We note that despite having superior operations with impressive track record of growth, no regulatory overhang, low cost base backed by outsourcing model, diversified customer base and strong future growth potential, the stock currently trades at a discount to global coal peers as well its own 5 year average valuation multiples. We expect net sales and EBITDA CAGR of 19.3% and 17.5% during FY12-15E. Valuations appear cheap to us with current discount of ~15% to global average of coal miners as well as Coal India. We initiate coverage with a BUY rating and a target price of Rs234.  Industry leading volume growth in lignite to continue: GMDC has remained a clear leader in the mining space with volume CAGR of 11.8% during FY09-12 on the back of increasing volumes from new mines. We expect the company to mirror its past track record going ahead and achieve volume CAGR of 10.7% during FY12-15E with increase in contributions from newer mines, EC limits for which are getting increased.


Bauxite volumes to almost double in two years: GMDC has recorded bauxite sales at 8.7 lakh tonne in FY12, up impressively by 31% YoY. Bauxite business is lucrative for the company with operating margin of ~40% and we have factored in 1.1/1.6 MT of bauxite sales from GMDC in FY13E/14E. Bauxite JV with Nalco for supplying 3 MT bauxite annually at LME linked fixed price in the long run is a positive step for stable bauxite operations.


Pricing power in lignite remains strong with location advantage: GMDC has maintained strong pricing power (CAGR of 9.3% during FY09-12) due to i) no major regulatory hurdle in taking price hikes in lignite in Gujarat ii) strong demand from diversified customer base of GMDC and iii) linking of GMDC’s pricing to similar grade (F) coal prices of Coal India (Coal India has taken several price increases during the last two years). We expect GMDC blended realizations to increase at 6% CAGR during FY12-15E.


High productivity and low cost due to outsourcing based model: GMDC has seen ~80% increase in employee productivity on account of a constant reduction in workforce (~20% reduction from FY09 to FY12) and a subsequent increase in volumes. Company’s outsourcing based model has helped maintain volume growth and kept costs low (GMDC cost/tonne is lower than that of Coal India and EBITDA/tonne is substantially higher). We expect EBITDA CAGR of ~17.5% during FY12-15E.

Valuations – attractive, initiate with a Buy: We see GMDC stock trading at attractive valuations with current valuations at ~15% discount to global coal peers and Coal India. We have valued GMDC at 6.5x FY14E EV/EBITDA (premium of ~10% to global CY13E average for coal players). We get a fair value of Rs234/share for GMDC from our EV/EBITDA valuation. At our target price, the stock discounts its FY14E EPS of ~Rs21.6 by 10.8x (around 10% discount to current global average of ~12x for CY13E/FY14E). We initiate Buy with a target price of Rs234. 


Key Risks: Lower production growth in lignite and bauxite, price control by state government on lignite, implementation of 26% mining tax proposed in new mining bill.


RISH TRADER