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Unique Monopoly

GMDC, with its captive end-user base in Gujarat has found a niche for itself which has the necessary pricing power and pull

Established in 1963 by the Gujarat Government, Gujarat Mineral Development Corporation (GMDC) is engaged in the mining of lignite, bauxite, fluorspar, and manganese ore and power generation. GMDC is one of the largest miner and seller of lignite in India, which also contributes 80 per cent to the revenue of the company. Currently GMDC operates five lignite mines Panandhro, Tadkeshwar, Mata-no-Madh, Rajpardi and Bhavnagar, which is the largest mines among the five. The company's Akrimota thermal power project operates from Nani Chher in Kutchh district with the capacity of 250MW.

Strength
GMDC's biggest strength is uninterrupted demand for lignite in Gujarat and being a monopoly. These two give it the necessary pricing power and also creates a moat. In comparison, Coal India, its biggest rival has its nearest plant 700 km away, which makes it an expensive proposition for consumers in Gujarat. Moreover, GMDC commands a better margin over Coal India by checking on its costs by way of less employee cost and also lower power and fuels costs. For instance, employee cost in case of Coal India accounted for 34 per cent of the net revenues in FY13 while GMDC checked it at 6 per cent thus offering a cheaper product.

What more, GMDC also benefits from its pricing being insensitive to international prices because its customers are SMEs with boilers that are designed to run on domestic lignite. This restricts the end-users from switching to other form of coal. Further, the company's bauxite segment has witnessed good volumes growth in the past three years at an annualised rate of 37 per cent, which is expected to continue in the near future. To continue exploiting this fast growing demand the company has partnered with NALCO to set up a 1 MT alumina refinery and a 0.5 MT aluminium smelter in Kutch, Gujarat. To this effect, the company has acquired 104 hectares, with an additional 400 hectare in the pipeline to be acquired.

Growth drivers
In the past one year, GMDC has witnessed a slight fall in lignite volume due to lack of land for dumping waste and high thickness of the stones which slows down the speed of mining. To tackle this problem the company has expanded its capacity by adding 1MT at Mata No Madh mine and 2MT at Bhavnagar mine in FY14. GMDC has also got the necessary regulatory clearance for Umarsar mine to be operational. All these moves will add up the volume and address the issues faced by the company in earlier years.

GMDC is developing a beneficiation plant at its Bhavnagar plant to help it increase its realisation per tonne. If this plan becomes successful, then GMDC will implement this model in all its other plants as well. Likewise, the anticipated price hike, which is due this year will further fuel its revenue growth.

The company's power plant with a capacity of 250MW operates at very low plant load factor (PLF) of 50-55 per cent, which is a measure of average capacity utilisation and efficiency of the power plant due to high fixed costs in FY-13. To improve its efficiencies GMDC has outsourced the plant operation and maintenance to Korean company, KEPCO. The tie-up between has resulted in improved PLF of 60-65 per cent in FY-14. The target PLF is 75 per cent.

Revenue from this segment has contribution of 15 per cent to the total revenue but once the said target will be achieved it will also start contributing significantly to profits which is currently 4 per cent only. If the revival plan of the power plant is successful and achieves the required IRR, then the company will add up another 250MW of thermal power capacity to make it a total of 500MW. In the wind power segment 29MW is planned to add to the existing capacity of 121MW.

Concerns
Short term concern include, mining affected due to rainfall and water logging. This happened in FY14, as well, which hampered volume growth. A long term solution to this problem need to be addressed.

The capacity expansion in the Mata no Madh and Bhavnagar, is delayed and will be completed in FY15. Any further delays can lead to flat volume in the coming year. Also, the price hike expected this year can lead to margin loss if it is postponed further.

Mine reserves are depleting fast as in the case at Panandhro, where the reserve is left only for the next couple of years. To maintain the reserve, GMDC will gradually start Akrimota mine to replace Panandhro. The company will also add mines at Umarsar in FY15 and Lakhpat Punrajpur in FY16, with Damlai Padal mine to come later. GMDC will not face any dearth of reserves, but any unforeseen, regulatory hurdle can put the volume growth under pressure; the chances of which are pretty low.

The most recent issue is the increase in export duty on Bauxite from 10 to 20 per cent in the recent budget. This paves way for the availability of the raw material for domestic players in the aluminium players. However, the move will not affect GMDC directly as it does not export its bauxite currently but may increase the price competitiveness in the domestic market.

Financials
GMDC has consistently generated free cash flow since 2006. This is likely to continue even after considering the capital expenditure planned for the current and next year. The company has been debt free since 2012 which has also helped in the rise in its net margin. On the operational front, GMDC has substantially reduced its receivables from 50 days in 2007 to 9 days in 2013 thus improving cash from operations and realising cash from the working capital. The company has witnessed a growth in top-line in the past 5 years at an annualised rate of 6 per cent growth due to productivity factors.

Valuations
Currently the stock is trading at ₹153 and price to earnings of 11. Despite the current surge in the prices due to the post election bull rally it is still 8 per cent below its 5 year median price to earnings of 12 and at price to book of 1.70 it is 30 per cent discount to 5 year average of 2.44. This shows fear still persist in the market for this stock due to its inherent features of the sector and government ownership. Capitalise on the value for a long term investment horizon.