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GMDC's Q2FY20 results (Outperformer) - Growth missing; inexpensive valuation

Q2FY20 result- underperformance on all fronts

GMDC reported EBITDA of Rs276m, much lower than expected EBITDA of Rs708m due to lower than expected lignite realisation, higher mining costs (mining cost/t was up 36% yoy) and higher employee cost. On a yoy basis, EBITDA declined 64% due to lower lignite and power volumes and higher mining cost offsetting higher realisation.

• Mining EBIT, at Rs25m, was down 93% yoy due to lower lignite volumes (1.14mt, down 14% yoy), higher mining cost (Rs1,765, up 36% yoy) offset by higher lignite realisation (Rs1,787/t, up 13% yoy). Heavy monsoon disrupted mining and also led to higher fixed cost. Lignite realisations were up due to 10% hike in prices taken w.e.f. 1^st Jun, 2019. Mining cost were higher due to increase in fixed cost and higher overburden removal cost. As a result, EBIT/t was Rs22 (Q2FY19: Rs288).
• Power EBIT, at Rs165m, down 55% yoy (Q1FY20: Rs276m). This decline is mainly due to lower PLF in 250MW power plant at Akrimota (34% in Q2FY20 vs 48% in Q2FY19) leading to 29% yoy decline in power generation to 186 mu.

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

Key Positives: Higher lignite realisation

Impact on financials: Reduce FY20/FY21 EBITDA by 32%/28% to factor in higher mining cost, lower lignite and power volume

Valuation & view: Reiterate Outperformer with reduced TP of Rs91

GMDC’s profitability continues to remain adversely affected due to higher stripping ratio, heavy monsoon and lower power generation despite 10% increase in lignite prices in June 2019. The company is unable to ramp up volumes in Bhavnagar and Mata No Madh mines. In absence of Panadharo mine (reserves exhausted and mining stopped in April 2019) and heavy monsoon disrupting volume, we expect volumes to fall 11% yoy in FY20 to 7.9mt, however, we expect 8% volumes growth in FY21E. As a result, FY20 EBITDA is expected to fall by 40% yoy to Rs3.4bn. GMDC has cash of Rs10.4bn (Rs33/sh) at Q2FY20-end which is 55% of CMP. At CMP of Rs60, the stock is trading inexpensive at 1.4x FY21E EV/EBITDA. With cut in earnings, we reduce our target price to Rs91 (Rs115), valuing the stock at 4.0x FY21E EV/EBITDA.