FREE

GMDC's Q3FY19 results (Outperformer) - Declining volumes, high mining cost hurts profits

Q3FY19 result- Higher mining cost & lower lignite volume drags EBITDA

GMDC reported lower-than-expected operating results with EBITDA of Rs610m, down 53% yoy. This underperformance was due to higher mining cost which was due to much higher overburden removal cost.

• Mining EBIT, at Rs491mn, was down 64% yoy due to 22% lower lignite volume (2.1mt) and higher mining cost (Rs1,496/t, up 19% yoy) due to much higher overburden removal compared to lignite volume. Change from turnkey contracts for lignite mining to separate contracts for overburden removal and lignite volume led to higher mining cost.
• Blended lignite realisation, at Rs1,729/t, though up 4.2% yoy (Rs70/t) was not enough to offset increase in mining cost (Rs243/t). Moreover, realisation was higher by Rs70/t only despite average price hike of Rs. 150/t taken in April 2018. This was due to adverse volume and customer mix. As a result, mining EBIT/t was Rs233, down 54% yoy.
• Power EBIT stood at Rs7m (Q2FY19: Rs367m) v/s loss of Rs110 in Q3FY18. The continuous lower PLF at Akrimota power plant (46% PLF in Q3 v/s 48% in Q2) along with higher repair cost dented lignite power profits. Wind volume, too was down 67% qoq to 49m units (due to seasonality) which further affected profits adversely.

Key Negatives: Lower lignite volumes, higher mining costs

Impact on financials: We reduce EBITDA estimates by ~26% in FY19E and ~24% in FY20E to factor in lower volume and higher mining cost; Introduce FY21e

Valuation & view: Reiterate Outperformer with revised TP of Rs114

We expect GMDC’s profitability to remain subdued even in FY20E as mining cost is likely to remain elevated due to high overburden removal as it looks to ramp up production from Mata no Madh and Bhavnagar mines post closure of production from Panadharo mines in FY19. Volume, too, is expected to remain subdued in FY20 (up 2% yoy to 9.4mt) due to delayed ramp up of production from mines. Due to pressure on lignite profitability and lack of any volume growth, we reduce target EV/EBITDA multiple to 4.5x from 5.5x. As a result, we arrive at a revised target price of Rs114 (earlier Rs162) based on 4.5x FY20E EV/EBITDA. On the basis of low valuation (trading at 2.0x FY20E EV/EBITDA) and FY19E cash of Rs38/sh, we reiterate Outperformer.