Gujarat Mineral Development Corp. (GMDC) is one of the leading mining and mineral processing companies in India. It supplies lignite to various industrial units, including textiles, chemicals, ceramics and captive power plants.
GMDC's operations and client base is predominantly in Gujarat, where its mined lignite acts as a substitute to coal, which is otherwise expensive due to the transportation cost involved with coal. The company also recently announced a JV with NALCO for setting up a 1 MTPA refinery.
Strengths
GMDC is the biggest miner of lignite in the state and produces about 11.3 MTPA of lignite from its five mines in Gujarat. Apart from lignite, it also produces bauxite, fluorspar, and manganese ore and operates a 250 MW lignite-based power plant. The company also operates a 150MW wind power plant and a 5 MW solar power plant.
The company's operations are diversified and it derives 76 per cent of its revenue from lignite, 5 per cent from Bauxite and 18 per cent from power sales. GMDC has monopoly in Gujarat to sell lignite.
Concerns
Decline in lignite volumes by 43 per cent in the quarter ended September 2013 over the corresponding period of the previous year is a cause for worry. The main reason for the decline was anaemic demand and production bottlenecks along with heavy rains that played spoilsport. Volumes at Tadkeshwar mine fell to 3.66 million tonne in the first half of the current financial from 8.29 million tonne in the corresponding period of the previous year. Similarly, volumes at Rajpardi mine were down from 5.1 million tonne to 2.99 million tonne. However, volume is likely to pick up by the fourth quarter of the current financial year.
No change in price is yet another concern. Although the last price increase was in February 2013; weak demand, price competition from imported coal and other political considerations have put a lid on price hikes even in the face of escalating costs. Decline in power generation by 37 per cent (y-o-y) on account of weak off take and maintenance shutdown. These factors have resulted in lower realisation. In the September 2013 quarter, realisation was down as much as 24 per cent over the corresponding period of the previous year to Rs 1,198 per tonne. The fall in realisation was due to change in consumer mix and lower realisation from its Panandhro mine.
Margins were down also on count of higher expenditure. Cost inflation due to higher other expenditure resulted in cost per tonne jumping from Rs 840 per tonne a year ago to Rs 926 per tonne. Mining Ebit margins as a result of higher costs fell from 66 per cent a year ago to 41 per cent.
Another concern is GMDC's government mandated capex schedule. It decided to go to thermal power plant and spent resources between FY97-03 in building it, and in FY-6-12 it entered into the wind energy space and invested; both these investments in power plants are struggling. Consequently, Ebitda margins fell from 56.9 per cent levels a year ago to 41.1 per cent in the September 2013 quarter. These costs are expected to remain elevated for some time on account of higher overhead and fuel costs.
Valuation
GMDC has lost nearly half of its market valuation in 2013. The stock now trades at a seven times its earnings. However, that may not signify value yet. Weak demand that has not shown any signs of turnaround, falling volumes and realisations could keep the pressure. A weak business environment and political compulsions may keep much needed price hikes in check. That may put earnings under further stress. Under the prevalent conditions, avoid GMDC.
This article was originally published on February 28, 2014.
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