IDFC Securities - Gujarat Mineral Development Corp. Ltd. (GMDCLTD) Initiating coverage: GMDC (Outperformer) - A cash cow at a bargain price

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IDFC Securities

Ashish Kejriwal

Initiating coverage: GMDC (Outperformer) - A cash cow at a bargain price

Gujarat Mineral Development Corporation (GMDC), 74% owned by the Gujarat government, is a sole lignite merchant miner in the state with ~120mt of mineable reserves at the company’s existing mines. In April 2018, the company hiked lignite prices by Rs150/t across its mines, which we believe will spur FY19E earnings to Rs5.4bn (23% yoy). We estimate 6% CAGR in lignite prices and company’s renewed emphasis to improve profitability at its 250MW lignite-based power plant to drive 16% EBITDA CAGR over FY18-20E. Higher operating cash flows should also enhance GMDC’s net cash position from Rs35/share in FY18 to Rs48/share in FY20E. The stock looks attractive at 2.5x FY20E EV/EBITDA. We initiate coverage on GMDC with an Outperformer rating and value the company at 5.5x FY20E EV/EBITDA to arrive at our target price of Rs171.

Lignite price hike to remain steady: GMDC hiked lignite prices in April 2018 by Rs150/t across its mines. We do not perceive any downside risk to lignite prices (even post hike), as GMDC sells lignite at ~35% discount to imported coal. The price hike will help offset lower volumes in FY19E, aiding 29% yoy growth in EBITDA. Renewed emphasis on lignite power plant will help improve average PLF from 62% in FY18 to 65% in FY19E further to 70% in FY20E. As a result, we estimate 16% EBITDA CAGR over FY18-20E to Rs7.3bn.

Strong balance sheet with net cash of Rs48/sh as at FY20E-end: GMDC had net cash of ~Rs11.1bn (Rs35/share) as on 31^st March 2018. Price hike in lignite and improving financials from power business should help improve operating cashflow to Rs4.8bn in FY19E and Rs6.0bn in FY20E. As we expect GMDC to incur capex of Rs2.0bn each for FY19E and FY20E, mainly towards acquiring land for future mining projects, net cash should increase to ~Rs15.2bn (Rs48/share) in FY20E.

Initiate with an Outperformer; target price of Rs171: GMDC has been trading at an average one-year forward EV/EBITDA of 5.3x over last five years. We believe the stock should trade at premium valuations, as the company is back on the growth (FY19E profits up by 23% yoy) with higher lignite and wind power profits and expected improvement in lignite power plants. We estimate 16% EBITDA CAGR over FY18-20E to Rs7.3bn and value the company at 5.5x FY20E EV/EBITDA to arrive at our target price of Rs171. We initiate coverage on GMDC with an Outperformer rating.

06/06/2018 18 EN

Underlying

Gujarat Mineral Development Corp. Ltd.

Gujarat Mineral Development Corporation Ltd. Gujarat Mineral Development Corporation Limited is a holding company. The Company operates through two segments: Mining and Power. The Company's projects include Lignite, Bauxite, Fluorspar, Multi-Metal, Manganese, Power, Wind and Solar. It operates over six lignite mines, namely, Panandhro, Mata-No-Madh, Rajpardi, Tadkeshwar, Bhavnagar and Umarsar. The Company has bauxite mining operations at its Mewasa Bauxite Mines in Devbhoomi Dwarka, district of Gujarat. The Company's Fluorspar project is located at Kadipani, district of Baroda. The Company's Multi-Metal project is located at Ambaji, district of Banaskantha. The Company's Manganese project is located at Shivrajpur, district of Panchmahal. Its Power project is located at Nani Chher, district of Kutch. The Company's Wind Farm projects of 150.9 megawatts are situated at different locations in Gujarat, and a five megawatt peak Solar Power Project is situated at Panandhro Lignite Project.

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INE131A01031 National Stock Exchange of India India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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Analysts

Ashish Kejriwal

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Initiating coverage: GMDC (Outperformer) - A cash cow at a bargain price

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Event update: Aurobindo Pharma (Outperformer) - Unit IV receives EIR; positive outcome

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