Gujarat Mineral Development Corporation (GMDC) Research Report By Karvy

Reduced Tax Incidence: Igniting Lignite Demand

The company reported an impressive performance in Q3FY18, wherein top line grew by 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. Higher realization in lignite business led EBITDA and PAT margin to improve by 856 and 328 bps respectively on YoY basis. EPS too, registered a growth of 69.2% on YoY basis. Going forward factors like, sound financial, vast array of mineral products, several upcoming mines and power projects; and up trending commodities’ prices brighten the prospect for mining and power business which makes stock clear value buying. We rate “BUY” on stock with TP of Rs. 170, which gives 24% potential upside.

Upcoming Projects to Boost Sales Performance:

GMDC has 6 operational lignite mines. The Ministry of Coal has allotted 3 lignite blocks, whereas 2 lignite blocks have been kept reserved for the company. Collectively these 3 mines have estimated 34 Mn tons of lignite reserves. Apart from lignite, the company is also into bauxite, fluorspar, manganese, silica sand, limestone and betonies mining. The company is in process of setting up of Fluorspar Benefication Plant of 40000 TPA capacity and plant for Zeolite and other value added products. GMDC will supply 120000 TPA NPG Bauxite to M/S Credo Mineral Industries Ltd. The company is also in process of setting up a Silica Sans Benefication Plant of 150000 TPA capacity and Lignite based 500 MW Power Plant.

Valuation and Risks

Strengthening of commodities’ prices in general and likely increased demand for power, following implementation of schemes like, UDAY, Deen Dayal Yojana and Saubhagya augur very well for the company. Furthermore, the company enjoyed robust financials in FY17 with zero debt, EBITDA margin of 26.4%, PAT margin of 20.5%, BV/share of Rs.126 and cash & cash equivalent of Rs. 500 Mn make this stock value buy. While introducing FY20E, we have valued stock on 1yr forward PE 8x of FY20E EPS, which is inching towards MSCI Energy India Index average PE of 8.9 with TP of Rs. 170 with potential upside of 24% for the next 9-12 months. However, likely auctioning of coal mines for commercial use is a risk.