GMDC: Production loss concerns overdone

The company's efforts to recoup lost output, expected increase in prices and attractive valuations indicate potential for upside

The Gujarat Mineral Development Corporation (GMDC) share price had fallen from Rs 215 apiece in January 2013 to a recent low of Rs 119, due to declining production. Overall, production is down 37 per cent and 30 per cent on a year-on-year basis at its Bhavnagar and Tadkeshwar mines, respectively, during the January-May 2013 period.

In order to reverse the trend, the management is taking various steps such as speeding up land acquisition, appointment of an additional contractor at Bhavnagar and shifting of mining area at Tadkeshwar to thicker seam, the benefits of which will start reflecting from the September 2013 quarter.

Also, since the company is planning a price increase in the coming months, some of the productivity loss could be set-off, minimising the impact. After considering these moves, and given that earnings are expected to grow in the region of seven to eight per cent in FY14, the markets seem to have unduly penalised the stock. At Rs 128, it is currently trading at six times its adjusted earnings for FY14 (after taking impact of production loss), which is attractive for a company with 24 per cent return on equity and debt-free status with Rs 400 crore cash in the books, which is 10 per cent of its Rs 4,000-crore market capitalisation.

GMDC earns bulk of its revenue by selling lignite extracted from its mines; it accounts for 85-90 per cent of total revenue. Because of lower lignite production, the company is now expected to report lignite sales volumes of 11.6 million tonnes in FY14 against 13.6 million tonnes expected earlier. Even at these lower expectations, sales volumes will be 6.4 per cent higher than lignite sales volumes of 10.9 million tonnes in FY13. However, lower production will have some impact on sales, which analysts now expect to grow 21 per cent in FY14, compared to earlier estimates of 38 per cent.

Higher realisations will help to some extent, though. “Price hike is expected to be higher than the earlier proposed Rs 100 per tonnes as Coal India has hiked prices by 10 per cent for coal, leaving GMDC with further room for price hikes. Price hike is expected to be decided in the next board meeting scheduled for June end or early July,” said Abhisar Jain, who tracks the company at Centrum Broking.

In FY14, lignite realisations are estimated to be in the region of Rs 1,358 per tonne, compared to Rs 1,216 per tonne in FY13.

In terms of profitability, analysts have lowered their earnings expectations by about 10 per cent due to the dip in volumes. They now expect the company to report earnings per share of Rs 21 in FY14, which is still higher than last year’s Rs 18.9. Upside to these estimates could come from the power business, albeit marginally.

The company has a 250-mw power plant, which it has handed over to KEPCO for running the operations and maintenance. Currently, the plant is running at a plant load factor (PLF) of 50-55 per cent.

With the plant likely to achieve stabilisation by August 2013, its PLF is also expected to rise to around 75 per cent, thereby leading to gains for GMDC in FY14 and FY15.