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GMDC's Q2FY19 results (Outperformer) - Mining disappoints

Q2FY19 result- Lower lignite volume & adverse mix drags down EBITDA

GMDC reported lower-than-expected operating results with EBITDA of Rs755m, down 25% yoy. This underperformance was due to lower blended lignite prices amid change in mining mix and under recovery of fixed costs due to lower volumes in lignite.

• Mining EBIT, at Rs381mn, was down 37% yoy due to 20% lower lignite volume (1.33mt). Lower volumes resulted in under recovery of fixed costs. Rising diesel prices (+23% yoy) has also led to increase in mining cost. Moreover, blended lignite realisation, at Rs1,587/t, was up Rs23/t yoy despite average price hike of Rs. 150/t taken by GMDC in April 2018. This was due to adverse volume mix. As a result, mining EBIT/t was Rs288, down 21% yoy.
• Power EBIT, at Rs367m, was up 59.2% yoy on account of increased profits from renewable energy. Net generation from wind power increased 24% yoy to 149m units. However, it reported EBIT loss of Rs 10mn from Akrimota lignite power due to lower PLF of 48% which resulted in under recovery of fixed cost.
• The company has written off its investment of Rs. 2.97bn in its associate company, Bhavnagar Energy Company Limited (BECL) consequent upon merger of BECL with Gujarat State Electricity Corporation Limited (GECL).

Key Positives: Increased power generation from wind power

Key Negatives: Lower lignite volumes, adverse volume mix and increased mining costs

Impact on financials: We reduce EBITDA estimates by ~4% and ~7% in FY19E and FY20E to factor in lower volume and higher mining cost

Valuation & view: Reiterate Outperformer with TP of Rs162

We still expect GMDC to record 24% yoy EBITDA growth in FY19E driven by higher lignite prices and improved power earnings. Further, we believe that write-off of investment in BECL will not have any adverse effect on profitability of the company as BECL was incurring losses and we had not built in any income from the same. At CMP, the company is available at 2.0x FY20E EV/EBITDA. We value the company at 5.5x FY20E EV/EBITDA and arrive at our target price of Rs162 (earlier Rs171). Reiterate Outperformer.