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You are here : IndiaNotes >> Research & Analysis >> Companies >> Gujarat Mineral Development Corporation Ltd. >> Research

Accumulate GMDC at current levels and add on dips for 40%-50% returns

Sanjay Chhabria | 28 Dec, 2016  | Follow Author | Add to my Favourites 
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Gujarat Mineral Development Corporation (GMDC) is into mining lignite, bauxite, fluorspar, and manganese ore, as well as power generation. GMDC is one of the largest miners and sellers of lignite in India. GMDC owned 74% by the Gujarat State Government is one of the leading mining and mineral processing companies in India. It supplies lignite to various industrial units, including textiles, chemicals, ceramics and captive power plants. GMDC's operations and client base is predominantly in Gujarat, where its mined lignite acts as a substitute to coal, which is otherwise expensive due to the transportation cost involved with coal. Currently GMDC operates five lignite mines Panandhro, Tadkeshwar, Mata-no-Madh, Rajpardi and Bhavnagar, which is the largest mines among the five. The company’s Akrimota thermal power project operates from Nani Chher in Kutchh district with the capacity of 250MW. GMDC’s biggest strength is uninterrupted demand for lignite in Gujarat and being a monopoly. These two give it the necessary pricing power and also creates a moat.

GMDC's core competency is the production and sale of lignite in Gujarat, which accounts for around 75% of the company's overall sales. It also has a presence in the power sector with wind, solar, and thermal power plants. The company enjoys exclusive lignite extraction rights in Gujarat. For the uninitiated, lignite is an inferior kind of coal used as an industrial fuel. Compared to coal, lignite offers cost savings of above 20%. The company's key end user industries are power, textiles, bricks, paper and paper board, etc. Gujarat being one of the most industrial states in India, the company has a good market for the goods it produce. The company has a quasi monopoly in lignite extraction and offers lignite for various industrial units including power companies that account of 50% usage, textiles, chemicals, ceramics, bricks etc. Amongst all its products, lignite is the biggest contributor to the company's revenue and accounts for around 75% of the revenues. Lignite sales volumes for the company stood at 7 MMT in FY16, down 20% YoY.

Lignite referred to as Brown Gold, is an alternative for coal which is in great demand, as natural resources are becoming scarce all over the world. There is a good sustained demand for lignite, an industrial fuel, in power generation, cement and urea manufacturing. It is cheaper than competing fuels like natural gas. The company has consistently made profits and rewarded the shareholders with good dividends/bonus in the past. GMDC operate in two segments: Mining and power. Lignite and bauxite dominate the mining portfolio in volume terms. This Gujarat Government company, has its biggest strength in the uninterrupted demand for lignite in Gujarat. It is also a monopoly, giving it pricing power, which also creates a moat. GMDC also derives about 20% of its revenue from its 250 MW thermal and 150 MW wind power plants.

Net profit of GMDC rose 35.5% to Rs 187.67 cr. in the half year ended September 2016. Sales rose 13.5% to Rs 658.15 cr. in the first half. The EPS for first half stands at Rs 5.9.  For the year ended March 2016, GMDC had posted a 16.9% drop in net sales to Rs 1178 cr., whereas net profit declined 39.4% to Rs 236.76 cr.. On a equity of 63.6 cr.(Promoters stake-74%, FII/DII stake-15.12%), the FY16 EPS on a Rs 2 paid up share stood at Rs 7.45 and the dividend declared was 150% (Rs 3 per share).  The company has been debt free since 2012 which has also helped in the rise in its net margin. GMDC can sell lignite to anyone in the market, and expects its revenues and profits to go up 25% in the next 12 months. Its RoCE is 14% and PE is a low 8

Low-cost lignite operations, a steady expansion track record and healthy growing captive market in the state of Gujarat make GMDC a good bet in the mining space. Being a monopoly player for lignite in Gujarat, GMDC will be in a strong position to capitalize on buoyant demand for lignite in the state. GMDC has good scope for growth as there is high demand for mineral products on account of growth in the manufacturing sector in India, in general, and Gujarat, in particular. The Corporation is venturing into value-added services through strategic partnerships with private sector companies. For a cyclical business that seems to be coming out of the trough of the cycle, is almost debt free, has offered average return on equity of 19% (FY 12-FY 16), positive operating cash flows, and free cash flows over the last decade, the current valuations seem attractive. At current valuations, the stock trades at 8.3 times its FY17E earnings (Rs 10.5 – Rs 11) and at 7 times FY18E earnings (Rs 12.5- Rs 13). Accumulate on declines

Investors can start accumulating the GMDC Stock at current levels and add more on declines for decent returns of 40%-50% over the next 8-12 months.

Sanjay Chhabria is an equity analyst and investment consultant based at Raipur (Chhattisgarh). He is a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000001592). At the time of writing this, he doesn’t have any position in the stocks mentioned above. He welcomes comments, feedback & investor queries at [email protected] and at 9893200307

Sanjay chhabria is bringing a weekly Investment newsletter “Market-View” since April 2001 to help small(retail) investors take an informed investment decision. He invites Readers to send him email/Whatasapp message(9893200307) to get free 1 week trial offer of “Market –View”.

Under no circumstances does the information in this report represent a recommendation to buy or sell stocks. This report has been prepared solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.

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About Sanjay Chhabria

Sanjay Chhabria is an equity analyst and investment consultant based at Raipur (Chhattisgarh). He brings out a weekly investment newsletter "Market-View" to help retail investors make informed investment decisions. He welcomes comments, feedback & investor queries at [email protected] and at 9893200307.

For more information please write in to [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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