Jitendra Kumar Gupta Moneycontrol Research
In any volatile market condition, stocks like GMDC offer great value in the light of attractive valuation and reasonable growth over the next two years. Post the recent correction from about Rs 180 in last year in November to currently at around Rs 130, the stock is offering a dividend yield of close to 3% and currently trading at 8 times its FY19 estimated earnings. The state owned mining and power generation company GMDC has zero debt and currently sitting on cash which is about 39 per share or 30% of its current market capitalisation.
Strong growth
Apart from valuations, growth too remains strong with the management recently upgrading its lignite production target of 10 million tonnes in FY18 as against 7.5 million tonnes in FY17. In the first nine months alone the company has achieved production of 7.2 million tonnes.
Moreover, higher volumes are coming at a time when the lignite prices are higher as a result of firm international coal prices. To put in perspective, lignite, which accounts for 85% of the revenues, recorded realisations of Rs 1653 per tonne during the first nine month of current fiscal as against Rs 1594 per tonne in the corresponding quarter last year.
This is precisely a reason that despite poor show from its power business, the company was able to post strong 68% year on year growth in net profit to Rs 78.6 crore in December quarter on a sales of Rs 380 crore, up by 33%.
The other big driver was lower tax under the GST at about 5% on lignite thus reducing the overall tax rate to 31.5% in December quarter as against 34.1% in the corresponding quarter last year. On the negative side, power business suffered 29% decline in sales in December quarter and reported Rs 11 crore loss as a result of decline in generation.
Earnings visibility
Lower tax, higher volumes and better realisation will continue to drive growth. The company is gradually pumping in surplus cash into the business thus increasing its mining production. Moreover allocation of three more lignite mines recently and its efforts to produce other value added minerals like fluorspar and zeolite will start reflecting in financials starting FY19.
Over the next two years, while power business may remain stable, higher production in the lignite business will drive the profitability. Management is expecting a 10% volume growth in over the next two years. And since Lignite, which is the substitute of coal and used in power plants, is back in demand prices too expected to remain firm thus allowing companies like GMDC to make higher realisations. Accounting for these factors, Street is expecting a close to 20% annual growth in profits over the next two years providing strong earnings visibility.
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