GMDC Research Reports By HDFC Securities And Equirus

Research Report by HDFC Sec

Proof of pudding

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.

The key takeaway of 4QFY17 nos is the ramp up of production from Mata-no-Madh, which delivered 1.07 mt (vs 1.37 mT in all of FY16). This is likely driven by strong demand from cement and power and underscores the ability of GMDC to ramp up its volumes if demand is strong.

Lowering of levies under GST will ensure that GMDC’s lignite remains competitive, which in turn will ensure strong demand. We have increased our volume assumptions (pg. 4). Our TP is now raised to 160 (6x FY19 EV/EBITDA vs 5x earlier)

Highlights of the quarter

– Contribution from Akrimota TPP remained stable, with 64% PLF in 4QFY17. Given this is sluggish season, wind power PLF declined to 25%, however on a higher base due to commissioning of 50 MW in 3QFY17. In lignite division, the pricing enjoyed by Bhavanagar declined marginally as the supplies of high grade lignite to BECL likely declined in 4QFY17. Mata-no-madh also supplied to Akrimota TPS, in addition to volumes from Umarsar and Panandhro.

– Near-term outlook: We expect GMDC to continue its strong volume run, which will be further aided once the new GST rates are notified. This will further be aided by continued strengthening in pet-coke prices, which will aid demand from cement and other industries running captive plants on pet-coke. Also, wind generation activity picks in 1H, further aiding PLFs for the installed capacity of 200MW.

Research Report by Equirus

GMDC posted strong numbers during 4Q with 116% yoy EBITDA growth, which came 21% ahead of EE, driven by 31% yoy growth in lignite sales volume and corresponding benefit of operating leverage. Mine closure expenses declined 47% yoy as company has already completed full provisioning for Mata-no-Madh and Panandhro mines for the full mine life, so in FY18, it will decline yoy. Company continues to see good traction in volumes due to higher imported coal prices and yoy volume growth in even April month was strong 34%. We are increasing our FY18E volumes by 3% and now assume 12% yoy lignite volume growth in FY18E. GST remains key trigger for pricing as highlighted in our Mar’17 note. We maintain LONG with revised Jun’18 DCF based PT of Rs 150 (earlier Mar’18 PT of Rs 137).

GST key trigger for price increase as Gujarat has 22.5% VAT on lignite vs. 5% VAT in other states: Lignite has VAT of 22.5% in Gujarat, which is significantly higher than 5% duty on lignite or coal in other States. Most of the States charge VAT @5% & Excise duty is at 6%, so GST rate is likely to be low around 12% as government would not like to increase cost of power. GST rate @12%/18% will reduce landed cost of lignite to customers by Rs. 290/185, and give GMDC room to increase prices. We are not factoring the same in our pricing but that poses an upside to our estimates.

Profitability to remain strong due to benefits of operating leverage in FY18E: We believe that lignite EBITDA per ton with improve further in FY18E to ~Rs. 246 from ~Rs. 229 driven by 1) higher volumes will lead to better operating leverage, 2) mine closure expenses will decline yoy as company has already provided full for Panandhro and Mata no Madh mines, and 3) Panandhro will remain operational in 1HFY18, where overburden removal charges are low as mine is towards the end of its life. We have increased blended ASPs to reflect change in supplies to power plants from Panandhro to Mata-no-Madh, which has high cost lignite.

EBITDA grew 116% yoy, 21% above EE due to high lignite profitability, other income lower due to lower yield on deposits: EBITDA/ton on lignite was strong Rs 364 vs. Rs 226 last year and Rs. 162 in 3QFY17 as per our estimates. Improvement was mainly driven by higher volumes. Other income declined 21% yoy & 37% qoq as yield on cash has come down and also cash balance was lower due to capex of ~Rs. 5bn during the year towards wind (Rs 3bn) and land acquisition. Account receivables increased due to dues from BECL, but that’s expected to normalize going ahead.