Buy GMDC; target of Rs 139: Emkay

Emkay's research report on Gujarat Mineral Development Corporation (GMDC)

GMDC's major product lignite saw a decline in volume from 11.34 mt in FY12 to 10.9 mt in FY13 and with disruptions, we expect FY14 volume to be 8.4 mt. This sharp fall in volume can be attributed to unprecedented rainfall during Q2FY14 in Gujarat that severely affected Rajpardi, Tadkeshwar and Bhavnagar mines. Also, due to delay in land acquisition for overburden removal at Bhavnagar, the full ramp up could not be done. Now, since the waterlogging has been taken care of and land acquisition process started after getting the necessary approvals, mining output has already started going up. In addition, the new Umarasar mine is likely to start operation soon. The company has an ambitious plan to achieve 13.5 mt volume in FY15. Even if the company doesn't go to that figure, we believe that normalization of volume is very much possible. We estimate 9.8 mt and 10.8 mt volume for FY15 and FY16 respectively.

The company has been constructing a beneficiation plant at Bhavnagar through a third party. This way the contribution is likely to be higher by Rs 250/ tonne. The company plans to replicate this model in other mines too once its successful. On the other hand, the power plant is likely to be stabilized further under the KEPCO and should contribute higher. These two factors, we believe, would gradually aid the margins. But when it comes to trigger, it's the price hike, which is due for sometime. Believe, GMDC is now better placed to have a price hike with strong demand and rise in domestic coal prices.

With the increase in volume and likely higher prices, we believe, that the cash flow of the company to improve going forward. At present the company has a capex plan of Rs 4- 4.5 bn each for FY14 and FY15. We estimate FCF of Rs 1.4, Rs 1.9 bn and Rs 2 bn for FY14, FY15 and FY16 respectively.

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