Stock recommendations of Vijay Kedia and Mudar Patherya
It is obvious that novice investors like you and me cannot afford to ignore the stock recommendations of stalwarts like Vijay Kedia and Mudar Patherya.
Vijay Kedia needs no introduction. We have prospered immensely from his stock tips like Heritage Foods, Sudarshan Chemicals, GHCL, Karnataka Bank, Astec Lifesciences, Cera Sanitaryware, Apcotex etc.
Mudar Patherya has also rendered yeoman service to us. His buy recommendations like Caplin Labs (next Ajanta Pharma), Adani Transmission (multiple triggers to give multibagger gains), APL Apollo (can’t stop gushing) have surged like rockets and filled our pocket with big bucks.
GMDC – Vijay Kedia’s stock pick
Vijay Kedia spotted the potential of Gujarat Mineral Development Corporation (GMDC) in November 2015 when it was languishing unwanted and quoting at beggarly valuations (see Vijay Kedia Turns Contrarian & Buys Beaten Down PSU Stock).
@freemanrodrigue GMDC looks cheap to me. But do your homework. I have vested interests in it.
— Vijay Kedia (@VijayKedia1) November 19, 2015
Unfortunately, Vijay Kedia did not reveal the quantum of his investment. It is also not known whether he is still invested in the stock.
However, given that the fundamentals of GMDC are still good, we can presume that Vijay Kedia would still regard it as a good investment candidate.
GMDC is a stock to bet salary on: Mudar Patherya
Mudar has come out with all guns blazing in favour of GMDC. His precise words are as follows:
“Gujarat Mineral Development Corporation: If I had to place my salary on one stock (from the ones whose results have been announced), it would be GMDC. The company’s post-tax profit improved from ~219 crore in 2015-16 to ~324 crore in 2016-17. The last quarter’s annualised post-tax profit momentum is higher (~90 crore). Any company that reports an 18 per cent pretax margin and improves it by 600 basis points in the last quarter tells me that it is in the grip of a positive sectoral momentum. The GST (goods and services tax) could prove to be another kicker, moderating tax incidence.”
As one can see, Mudar’s view is that the blockbuster Q4FY17 results reported by GMDC indicate that it is in “the grip of a positive sectoral momentum”.
He has also opined that GST rates will result in huge savings and be beneficial for the Company.
|GUJARAT MINERAL DEVELOPMENT CORPORATION LTD – KEY FUNDAMENTALS|
|MARKET CAP||(Rs CR)||4,261|
|EPS – TTM||(Rs)||[*S]||10.20|
|LATEST DIVIDEND DATE||21 SEP 2016|
|BOOK VALUE / SHARE||(Rs)||[*S]||125.02|
[*C] Consolidated [*S] Standalone
|GUJARAT MINERAL DEVELOPMENT CORPORATION LTD – FINANCIAL RESULTS|
|PARTICULARS (Rs CR)||MAR 2017||MAR 2016||% CHG|
Buy recommendation by SP Tulsian
SP Tulsian, the veteran stock picker, is also a strong believer in the prospects of GMDC.
He laid bare his investment rationale in the following words:
“One stock that comes to mind having strong fundamentals, that has gone unnoticed is Gujarat Mineral Development Corporation (GMDC). People feel that this is the only natural resources company but they have lignite mining that lignite, bauxite and maybe manganese.
If you see, lignite is a coal substitute. It is lighter kind of energy which is 30 percent cheaper coal and they have their own mining. Apart from that, they have the power generation capacity of 250 megawatt thermal power and 200 megawatt of wind energy. And if you see, on the balance sheet front, the market cap is Rs 3,200 crore. The company is totally debt free. And of that, about Rs 1,600 crore are lying in the cash and cash equivalent.
That means, you are getting the company for Rs 1,600 crore. And the earnings per share for the current year is expected to be at about Rs 12 because they have already posted an EPS of Rs 6 for H1 and if you see the dividend track record, Rs 3 dividend is being paid by the company continuously for last five years with government of Gujarat holding about 75 percent stake in the company.
You have a natural resource as mining that is lignite, manganese and bauxite and apart from that, the power generation which is a profit making company. So, I do not think that there can be any other company having such a good combination and amongst the power generation company which is having a debt free balance sheet and even if you take this 700 megawatt or maybe 600 megawatt power project, that alone gives you the net present value of closer to about Rs 2,000 crore. So, at that point of time, you have initially asked me, but I was just trying to, so this GMDC looks quite interesting and I think the stock is now ruling at around Rs 103-104. So, it has a potential to maybe to move to a level of Rs 135-140 maybe in the next couple of months and it is an excellent stock looking for the portfolio.”
SP Tulsian later recommended GMDC as a Budget 2017 stock pick with a target price of Rs. 170.
Buy recommendation by HDFC Securities
HDFC Securities has recommended a buy of GMDC on the following logic:
“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.”
Buy recommendation of Equirus
Equirus has echoed logic that is similar to that of the others whilst recommending a buy:
“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.”
0% returns for 10 years, but time to buy now
Jitendra Kumar Gupta of Moneycontrol Research has written a detailed piece in which he has argued that the time is ripe to buy GMDC.
He explains that the reasons for GMDC’s woes in the past is the fact that there was ‘misalloacation’ of capital.
However, this has been set right now, he says:
“Thankfully, of late, the matrix is changing for the better. In Q4FY17, power has started to make profits with the PLF (plant load factor) moving to almost 64 percent. The company operates 250 MW of lignite-based power plant along with 150 MW of wind capacity with expectations that PLF will move up further. Investors can expect this large capital stuck in power business to start contributing to profitability thus generating higher cash flows and better returns ratios (return on equity etc).”
It is also stated that the Supreme Court’s order on compensatory tariffs, which is adverse to Tata Power and Adani Power which produce power using coal, is a blessing for GMDC because it produces power using lignite.
It is also stated that redeploying the cash in the books of Rs 1100 crore in the lignite business augers well because the business generates a return of 18 percent. Presently, the funds are invested in securities that yield only 11 percent.
GST provides huge benefit?
According to knowledgeable investors, the tax rates payable by GMDC have been slashed substantially.
Though the benefit has to be passed onto consumers, the fact is that if the prices are low, consumption will increase.
GMDC pays a VAT of 22.5% +6% excise in Guj. Post GST it should result in a straight 10% reduction in the co's Tax outgo.
— Kush Katakia (@kushkatakia) May 19, 2017
— Nigel D'Souza (@Nigel__DSouza) May 19, 2017
Prima facie, there are four circumstances which suggest that GMDC is a safe stock in relation to its peers in the small-cap space.
(i) GMDC is a PSU, with a holding of 74% by the Government. A large part of the balance 26% is held by institutional investors;
(ii) It is debt-free;
(iii) It offers a dividend yield of 2.25% which protects the downside;
(iv) The PE is about 9x on a forward basis, which is not unreasonable for a commodity stock.
Prima facie, it appears that Mudar Patherya is once again right in his stock recommendation. GMDC does look like a stock where we can bet our paltry salaries and come out smelling of roses!