GMDC: Lignite drives growth, cash reserves to support valuation

Jitendra Kumar Gupta Moneycontrol Research

The recent spike in international coal prices and a revival in demand from the power sector helped GMDC to report a strong set of numbers with sales growing at 42% in Q1FY18 to Rs 583 crore. GMDC, which is into lignite (substitute for coal) used in firing power plants, generates close to 85% revenue from lignite mining.

Volume-led growth During the quarter, the company sold close to 2.8 million tonnes of lignite up by 36% compared to the corresponding quarter last year. The company is gradually able to step up production. As against 6.98 million tonnes that it sold in FY16, GMDC sold close to 7.5 million tonnes in FY17 and in the current financial year, it is expected to do volumes of close to 9.6-9.8 million tonnes. Apart from volume, the company also benefitted because of the higher realisations. During the quarter-ended June 2017, realization jumped by close to 14% to Rs 1,569 per tonne thereby supporting strong growth in revenues.

Power: below its capacity Strong performance reported by the lignite business also compensated for the slowdown in its power business, which accounts for about 15% of its revenues and bulk of the capital employed in the business. During the quarter, while revenue from power business grew by 12% largely helped by an addition of 50 MW wind power plant, the segment profits before interest and tax dropped by 32% to Rs 23.7 crore. The performance was impacted due to drop in thermal power PLF (plant load factor) by 200 basis points to 61%, and costs related to the recently commissioned 50 MW wind power plant.

Valuation: supported by huge cash The demand for lignite, as a substitute for coal, is only going to increase with the implementation of GST. Because of the lower GST rates, the company is estimated to have saved close to 10% that was passed on the customers reducing the lignite prices in the month of July 2017.

With higher volumes and better realisations, the outlook for the lignite business remains intact. In FY19, the company is expected to report an EBITDA of close to Rs 655-660 crore. Factoring the same, the enterprise value at 6 times works out to about Rs 3,960 crore and including cash the same stands at Rs 6,420 crore, which is 42% higher compared to current market capitalisation of the company at Rs 4,500 crore, or Rs 142 a share.