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Monday, June 16, 2008

Research report - GMDC (Gujarat Mineral Dev.)

Gujarat Mineral Development (GMDC)
Report Date: June 16, 2008
CMP – Rs. 289.05
Target Price – Rs. 420/-
Mkt. Cap. - Rs. 4,595.9 crore
Recommendation : BUY

Investment Rationale
Ø GMDC has reported impressive performance for FY 2008. Net sales soared up by 66.5% to Rs 980.66 crore ledby 60.3% spurt in mining sales of Rs. 855.34 crore (Rs. 533.66 crore). Power turnover grew @ 31.8% to Rs.161.54 crore. OPM% expanded to 52.7% (47.6%) as power business turned around in Q4 FY 2008. Further aidedby 65.3% higher other income of Rs. 57.64 crore, PBT (before extraordinary items) zoomed to Rs 408.39 crore(Rs 167.75 crore). PAT shot up by 179.4% to Rs 263.93 crore (Rs 94.47 crore).


Ø GMDC is one of the leading mining and mineral processing companies. Company is into exploration of lignite,fluorspar and other minerals like Calcined bauxite, alumina, manganese, etc. Lignite is the mainstay product ofGMDC. Lignite is popularly termed as ‘Brown Gold’ across the world and is found abundant in Gujarat. GMDC,which uses best-known mining technology, is largest merchant seller of lignite in the country. It has new minesunder development at Rajpardi, Bhavnagar and Tadkeshwar with reserves of ~125 million mt. Increasing volumesfrom new mines will lead to volume growth. It should be noted that, lignite from these mines are of higher qualityand will fetch better realisations. Beside, company has also increased price of lignite w.e.f. Feb 2008.

Ø GMDC has been allotted two coal mine block of 350 million mt and 250 million mt in Morga (Chattisgarh) andNaini (Orissa) to be developed over next 4 years. These mines will feed two power projects of 2,750 MW and1,750 MW with GMDC investing in 26% of their equity. However, coal supply will be at arms length and marketdetermined rates and expect coal volumes at ~15-18mn mt in the next 4-5 years. With power business turningaround in FY 2008, profitability is expected to improve further in FY 2009.

Ø GMDC is setting up 6 mtpa cement plant in joint venture with Jaiprakash Associates in Gujarat. To power thiscement plant, company would have another joint venture with Gokul Group (oilseed processing major) to set up135 mw lignite-based power plant in Surat. While GMDC will have equity in both, the cement plant will haveequity in the power plant. With captive power and cement plant, GMDC is leveraging its “coal control” capacityto turn it into components of infrastructure development, such as power, cement, etc.


Ø Thus, GMDC is set to achieve turnover of Rs 10,000 crore by FY 2012.

Valuation

At CMP (Rs 2/- paid up), share is trading at 17.4 times FY 2008 actual EPS of Rs 16.60 and at 10.3 times FY 2009expected EPS of Rs 28/-. Higher volumes and realisations should enable GMDC to grow over next few years. Thiswill be complemented by a ramp up in coal mining. Further, buoyant realisations of coal will also increaseprobability of lignite price. Hence, we recommend to “BUY” the share at CMP.

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