Gujarat-based GMDC is a monopoly player in its state. That public sector mining can be a very profitable business is evident from the company’s operational metrics – Ebitda margins of 54 per cent (Q1FY13), return on capital of 35 per cent and a debt free balance sheet to boot.
Steady business: GMDC has a monopoly to sell lignite in Gujarat. With 150 million tonne of reserves and annual sales of 10.3 million tonne, the company has sufficient revenue visibility for the next couple of years. But it is not resting on existing capacity alone. Capacity expansion (detailed below) is on track to ensure future revenue growth.
Capacity expansion: GMDC is under process of doubling its lignite mining capacity in Bhavnagar and Kutch. While Bhavnagar is expected to see an increase in mining capacity from current levels of three million tonne to around 5 million tonne, the capacity in Kutch is expected to jump from 2.4 million tonne to 4.8 million tonne. The incremental capacity is expected to add another Rs 450 crore in topline growth for the company. Besides, the company has also entered the power segment with a 250 MW thermal power plant, 100 MW windfarm and 5 MW solar farm.
On a strong wicket: The management has guided a 10-15 per cent growth in lignite volumes in the next couple of years. That, according to Motilal Oswal, should help the company post an operating cash flow of Rs 900 crore in FY13 and FY14.
High margins: GMDC’s monopoly is its source of pricing power. In the most recent quarter, the company earned Ebitda margins of 54 per cent. That is not a one off. For the full year ended March 2012, the company earned Ebitda margins of 59 per cent. GMDC’s Ebitda margins averaged 47 per cent in the past five years, demonstrating stable earning power.
Higher realisations on the cards: GMDC undertook price hikes in FY12 but some large power plants continue to draw at lower rates. The company is talking with the state government to correct this problem. If the company is able to extract the higher prices from the erring power plants, that would add to its bottomline.
Other projects: The company plans to invest Rs 300 crore on wind power that will see an addition of 50MW. Then, there is the 74:26 JV between Nalco and GMDC to set up one million tonnes a year refinery in Kutch. While the government will provide 1,700 acres of land, GMDC will bring in three million tonnes of bauxite every year.
Outlook and valuations: Considering the investments it is making and the doubling of capacity, the immediate outlook for GMDC looks robust. It trades at an undemanding 12 times its TTM earnings. On a five year PEG basis, the stock trades at an attractive 0.48 times. Buy.