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GMDC's Q3FY20 results (Outperformer) - Triggers missing; awaiting volumegrowth

Q3FY20 result- Operationally in losses; other income saves the day

GMDC reported its worst ever operating performance in over a decade with EBITDA of Rs131m (IDFCe: Rs452m). Both of its business segments, lignite and power, disappointed with power slipping into EBIT losses again. Lignite segment suffers from higher mining cost which inturn was due to lower volume and higher stripping ratio at Mata-No-Madh mines (46% of volume). Other income, at Rs394m, was up 11% yoy and constitutes 133% of PBT in Q3FY20.

• Mining EBIT, at Rs82m, was down 83% yoy due to lower lignite volumes (1.59mt, down 25% yoy), higher mining cost (Rs1,857, up 24% yoy) offset by higher lignite realisation (Rs1,844/t, up 7% yoy). Heavy monsoon disrupted mining in Q3 too in mines like Tadkeshwar and Bhavnagar. Added to it, the stripping ratio at Mata-No-Madh mines (46% of volume) have increased, leading to higher overburden removal charges. Moreover, the company has to supply lignite to its captive power plant at Rs650-660/t while the mining cost is ~Rs900/t, thereby recording losses in lignite division. As a result, EBIT/t was Rs51 (Q3FY19: Rs233).
• Power recorded loss of Rs42m at EBIT (EBIT of Rs 7m in Q3FY19). This decline is mainly due to lower PLF in 250MW lignite power plant at Akrimota (34% in Q3FY20 vs 46% in Q3FY19). Its wind power plant has been running smoothly, offsetting some losses at lignite power plant

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

Key Positives: Higher lignite realisation

Impact on financials: Reduce FY20/FY21 EBITDA by 23%/25% to factor in higher mining cost, lower lignite and power volume

Valuation & view: Reiterate Outperformer with reduced TP of Rs78

GMDC’s profitability remain adversely affected due to lower lignite volume, higher stripping ratio and lower power generation. The company is unable to ramp up volumes in Bhavnagar and Mata No Madh mines and has to supply lignite to its power plant at a loss. Any meaningful earning recovery for GMDC will happen only when we visualise some volume growth, which is missing currently. The only solace is that GMDC has cash of Rs10.4bn (Rs33/sh) at Q2FY20-end which is 56% of CMP. At CMP of Rs59, the stock is trading inexpensive at 2.0x FY21E EV/EBITDA. With cut in earnings, we reduce our target price to Rs78 (Rs91), valuing the stock at 4.0x FY21E EV/EBITDA.​