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GMDC's Q1FY20 results (Outperformer) - Growth missing; inexpensive valuation

Q1FY20 result- Elevated mining cost hits profits

GMDC reported EBITDA of Rs1.14bn, lower than expected EBITDA of Rs1.75bn due to higher mining costs (mining cost/t was up 37% yoy) which in turn were due to higher stripping ratio. On yoy basis, EBITDA declined 55% due to lower lignite volumes (2.3mt, down 26% yoy), lower power volumes (290mu, down 38% yoy) and higher mining costs offset by higher lignite realisation (Rs1,845/t, up 5% yoy).

• Mining EBIT, at Rs760m was down 61% yoy due to lower lignite volumes (2.29mt, down 26% yoy), higher mining cost (Rs1,566, up 37% yoy) offset by higher lignite realisation (Rs1,845/t, up 5% yoy). It was marginally boosted by higher bauxite sales (Rs160m in Q1FY20 vs Rs40m in Q1FY19). Mining cost were higher due to high overburden removal cost. As a result, EBIT/t was Rs331, down 47% yoy.
• Power EBIT, at Rs276m, down 43% yoy (Q4FY19: Rs194m). This decline is mainly due to lower PLF in 250MW power plant at Akrimota (33% in Q1FY20 vs 72% in Q4FY20) leading to 54% yoy decline in power generation to 183 mu. Its wind energy has been performing well with PBT of Rs350m in Q1FY20.

Key Negatives: Lower lignite and power volumes, higher mining cost

Key Positives: Higher lignite realisation

Impact on financials: Reduce FY20/FY21 EBITDA by 18%/20% to factor in higher mining cost, lower lignite and power volume

Valuation & view: Reiterate Outperformer with reduced TP of Rs115

We expect profitability of GMDC to remain under pressure due to higher stripping ratio, partly offset by ~10% increase in lignite prices in June 2019. In absence of Panadharo mine (reserves exhausted and mining stopped in April 2019), we expect volumes to fall 3% yoy in FY20 to 8.9mt, however, we expect 7% volumes growth in FY21E. As a result, FY20 EBITDA is expected to fall by 12% yoy to Rs4.93bn. GMDC has cash of Rs10.5bn (Rs33/sh) at FY19-end which is 52% of CMP. At CMP of Rs65, the stock is trading inexpensive at 1.4x FY20E EV/EBITDA. We roll forward valuation to FY21E and value the stock at 4.0x FY21E EV/EBITDA and arrive at a value of Rs115/sh.