initiating coverage gmdc_ltd_buy_for_36_per_appreciation

Gujarat Mineral Development Crop Ltd.

BUY

- 1 of 12 - Monday 23rd

July, 2012

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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Target Price ` 255 CMP ` 187 FY14 EV/EBITDA 4.8x

Index Details

We initiate coverage on Gujarat Mineral Development Corporation Ltd (GMDC) as a BUY with a Price Objective of `255 (target 6.5x

FY14 EV/EBITDA). At CMP of `187, the stock is trading at 5.9x and 4.8x its EV/EBITDA estimated for FY13 & FY14 respectively, representing a potential upside of ~36% over a period of 18 months. Led by uptick in lignite volumes, price hikes, growth in bauxite business and possible turnaround in the power segment, we expect GMDC’s revenues and earnings to post a CAGR of

27.1% and 23.7% to `2636.2 crore and `745.3 crore, respectively by FY14. Being the sole trader of lignite and other minerals in the state of Gujarat, GMDC enjoys assured off-take and significant pricing power, thereby ensuring long term revenue visibility.

Visibility of higher lignite volume and pricing power provides significant revenue and earnings growth

On the back of commencement of new lignite mines and the management's ability to scale up production at the existing mines, GMDC's lignite segment has witnessed a robust production growth of ~7.3% CAGR over the period of 5 years from 2007 to 2012. Going forward, we expect this segment to grow at a CAGR of 13.5% from FY12-FY14 aided by the commissioning of the new mine - Umarsar and healthy production growth from existing mines. Additionally, on the back of being the sole player and absence of coal mines in the region of Gujarat, GMDC enjoys significant pricing power. This can be reiterated from the fact that GMDC has been able to increase lignite prices at a CAGR of 14.5% since FY07-FY12, enabling it to easily offset cost pressures.

Power business-worst already factored in

Due to technical and operational issues at its 250 MW (Kutch, Gujarat) lignite based thermal power plant, GMDC has seen a sharp decline in its PLF (40%) leading to lower revenues. The company is facing issues with the bellow in the boiler, which has been replaced 19 times till date. However, with current replacement working properly and plans to outsource O&M operations, we expect the loss making power business to stage a turnaround latest by FY14. We have factored in a PLF of 55% and 69% for FY13 and FY14 respectively.

Sensex 16,877

Nifty 5,118

BSE 100 5,131

Industry COAL

Scrip Details

Mkt Cap (` cr) 5,947

BVPS (`) 64.3

O/s Shares (Cr) 31.8

Av Vol (Lacs) 0.9

52 Week H/L 213/151

Div Yield (%) 1.5

FVPS (`) 2.0

Shareholding Pattern

Shareholders %

Promoters 74.0

DIIs 12.8

FIIs 6.8

Public 6.5

Total 100

GMDC. vs. Sensex

Key Financials (` in Cr)

Y/E Mar Net

Revenue EBITDA PAT EPS

EPS Growth (%)

RONW (%)

ROCE (%)

P/E (x)

EV/EBITDA (x)

2011 1414.8 654.0 374.8 11.8 34.0 22.4 33.7 15.9 9.0

2012 1630.7 760.4 486.8 15.3 29.9 23.8 35.7 12.2 7.7

2013E 2154.4 1003.1 603.4 19.0 23.9 23.8 36.8 9.9 5.9

2014E 2636.2 1238.9 745.3 23.4 23.5 23.5 36.9 8.0 4.8


July, 2012


In addition, GMDC holds a renewable energy portfolio of 105.5 MW, which predominantly consist of wind power assets (100.5 MW) besides a 5 MW solar power plant. In the wind power segment, the company plans to enhance its capacity by 50 MW annually taking the capacity to 200.5 MW by 2014 at an investment of ~ ` 600

crore.

Bauxite mining and other business to add further value

Besides lignite, GMDC is also engaged in the mining of minerals like bauxite, manganese, limestone, multi metal etc. On the back of ramp up in production at Gadhsisa mines, we expect bauxite segment revenues to grow at a CAGR of 57.7% to `193 crore over the forecast period. The other businesses are at an emerging stage and expected to take considerable time to prosper. GMDC and NALCO has formed a 26:74 JV to set up an alumina plant and aluminum smelter project in Kutch, Gujarat at an investment of `12,000 crore. GMDC is

expected to invest ` 170 crore in cash and ` 170 crore in the form of annual bauxite

supply of ~ 3 MMT. Post commissioning of operations in FY16, this is likely to generate additional revenue of ` 200 crore for the company with an operating margin

of 40%.

Valuation

At the CMP of `187, GMDC is trading at 5.9x and 4.8x its estimated EV/ EBITDA for FY13 and FY14, respectively. We initiate coverage on GMDC as a BUY with a Price Objective of ` 255 (6.5x FY14 EV/EBITDA) over a period of 18 months. Considering the increasing production, adequate reserves life of its mines and pricing power, we expect GMDC to continue to register robust growth. The bauxite mining business is also witnessing good growth and the JV with Nalco for setting up an alumina plant and aluminum smelter project, augurs well in terms of long term revenue visibility. However, we have not factored any business revenue from this JV in our earning model.


July, 2012


Company Background Being a sole trader of minerals in Gujarat, Gujarat Mineral Development Corporation Limited (GMDC) enjoys a dominant position for mining lignite and other minerals in Gujarat. Besides lignite, it mines minerals like bauxite, fluorspar, ball clays, silica sand and manganese. GMDC’s customer mix is diversified with power segment contributing to 51% of sales and rest of the demand coming from various other sectors like cement, paper, soda ash and chemicals, bricks and ceramics, textiles, and others.

Business Verticals

Source: GMDC, Ventura Research


July, 2012


Visibility of higher lignite volume and pricing power provides significant revenue and earnings growth

On the back of commencement of new lignite mines and the management's ability to scale up production at the existing mines, GMDC's lignite segment has witnessed a robust production growth of ~7.3% CAGR over the period of 5 years from 2007 to 2012. Going forward, we expect this segment to grow at a CAGR of 13.5% from FY12-FY14 aided by the commissioning of the new mine - Umarsar and healthy production growth from existing mines.

Additionally, being the sole player in the market and absence of coal mines in the region of Gujarat, GMDC enjoys significant pricing power. This can be reiterated from the fact that GMDC has been able to increase lignite prices at a CAGR of 14.5% since FY07-FY12, enabling it to easily offset cost pressures.

Lignite Production & Growth (%) Lignite Revenue & Growth (%)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

2

4

6

8

10

12

14

16

FY 08 FY 09 FY 10 FY 11 FY 12 FY 13E FY 14E

(In

. M

T)

Lignite Business Growth (%) RHS

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0.00

500.00

1000.00

1500.00

2000.00

2500.00

FY 11 FY 12 FY 13E FY 14E

Rs.C

rore

Lignite Revenue Growth (%)

Source: GMDC, Ventura Research Source: GMDC, Ventura Research

Sector wise demand for Lignite (%)

Power 51%

Cement10%

Textile 15%

Ceramics &

Bricks

10%

Others14%



July, 2012


Expanded capacity of Bhavnagar mines to commence operation in the next six months

GMDC's Bhavnagar mine has shown an impressive production growth of 76.2% CAGR to 2.1 MT for the period of 2009-2012. By FY14 this is expected to increase to 3.5 MT. The company plans to eventually increase this to 5 MT over the medium term and expects government approval over the next couple of quarters.

To improve the performance of Bhavnagar mines, GMDC has planned to set up a pyrite removal plant with the capacity of 1.5 MMT, which will help in lowering the sulphuric content in lignite from 5% to 1%. This would help in increasing the average calorific value to a minimum of 4500 Kcal from 3000 Kcal, leading to better realizations.

Production at new mines to offset the declining production from its largest mine at Panandhro

Despite declining production at its largest mine Panandhro from 3.6 MT in FY09 to 2.5 MT in FY12, other mines like Raj pardi, Mata-no-Madh and Tadkeshwar mines has shown a impressive ramp up in its production thereby ensuring significant volume growth.

Reduced volumes from the Panandhro mine have been effectively replaced by the enhanced production at Mata-no-Madh mines. Further, GMDC has applied for increasing the production capacity at Mata-no- Madh to ~ 4.8 MT from current 3.5 MT and expects to get an approval in the next 5- 6 months. Post approval, the company is likely to witness significant ramp up in production fuelling future growth.

To ensure long term growth and reserve addition, GMDC is all set to commission a new mine, Umarsar by the end of FY13 with 24 mt reserves and mining life of 24 years. In line with the management’s estimation, we expect Umarsar production to be 0.1 MT and 1 MT in FY13 and FY14, respectively. In addition, the company is also planning to open up two new mines named Dhedadi and Akirimoto, awaiting Government approvals and is expected to commission in the next three year.

Details of Lignite mines

Mines Names Type Location

Geological

Reserves

(in.MT)

Mineable

Reserves

(in.MT)

Production

(in.MT)

Rated

Capacity

R/P

Ratio

Panandhro Mine OC Kutch 112 109.0 2.6 3.0 41.9

Raj Pardhi OC Bhaurch 18.08 12.5 0.9 1.0 13.9

Mata no Madh OC Bhuj 48.92 33.9 3.6 3.0 9.4

Tadkeshwar OC Mandvi 48.92 33.9 2.2 2.5 15.4

Bhavnagar OC Bhavnagar 107.54 69.6 2.1 3.0 33.2

Umarsar OC Kutch 24.0 24.0



July, 2012


Additionally, on the back of being the sole player in the market and absence of coal mines in the region of Gujarat, GMDC enjoys significant pricing power. Comfortably insulated from any price correction Presently, GMDC sells lignite at a discount of 15-20% to Indian coal of equivalent calorific value (3,600kcal/kg). In view of rapidly increasing demand for energy and the massive need for coal, there is the least possibility of any drop in coal prices. Further, in the absence of coal mining in the state of Gujarat, increased transportation costs of domestic coal from the nearest coal field of WCL located 750 kms away in Nagpur (Maharashtra), makes lignite an economical choice compared to coal. This provides the company with sufficient head room to take further price hike in the near future, thereby ensuring profitability. Lignite by its nature cannot be stored for more than 7 days and hence the company mines the lignite only after off take contracts are signed and money for the shipment has been received. This insulates the company from any off take risk, besides keeping inventory at negligible levels.

Power business-worst already factored in

Due to technical and operational issues at its 250 MW (Kutch, Gujarat) lignite based thermal power plant, GMDC has seen a sharp decline in its PLF (40%) leading to lower revenues. The company is facing issues with the bellow in the boiler, which has been replaced 19 times last year. However, with current replacement working properly and plans to outsource O&M operations, we expect the loss making power business to stage a turnaround latest by FY14. We have factored in a PLF of 55% and 69% for FY13 and FY14 respectively. In addition, GMDC holds a renewable energy portfolio of 105.5 MW, which predominantly consist of wind power assets (100.5 MW) besides a 5 MW solar power

Lignite production

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2009 2010 2011 2012 2013E 2014E

(In

. M

T)

Panandhro Mata-no-Madh Tadkeshwar

Bhavnagar Umarsar Raj Pardhi Source: GMDC, Ventura Research

Lignite Production to grow despite lowered production from Panandhro mines


July, 2012


plant. In the wind power segment, the company plans to enhance its capacity by 50 MW every year taking the capacity to 200.5 MW by 2014 at an investment of ~ ` 600

crore.

Bellow issues stands resolved, PLF set to increase

GMDC’s 250 MW thermal power plant reached peak production in FY10. Post that the power plant has been witnessing continuous decline in revenue and profitability on the back of bellow (type of expansion joints in the boiler) replacement issues. Last year, the bellow has been replaced 19 times. Each time, the company loses 5 to 7 days of plant availability on account of bellow replacement reducing the PLF significantly. However the bellow issue has been resolved and it is expected that the power plants will start functioning optimally in the next few months.

In order to prevent future mishaps and stabilize operation at its current power plant, GMDC plans to outsource its O&M activity to third party power generators. The company has invited bids for the same and GIPCL and Lanco Power are among the forerunners. The company expects to complete the process in the next 5-6 months. The company hopes that this step would help in improving the PLF of the power plant. We expect the company's PLF to grow to 55% and 69% in FY13 and FY14 respectively from the current 40%. Accordingly, we expect the revenues of the power segment to grow at a CAGR of 15.1 % to ` 271.0 crore over the forecast period and

lower the losses through increased PLF.

Investments in renewable power to enhance generation portfolio

Currently, GMDC’s 105.5 MW renewable power portfolio includes the recently commissioned 5 MW solar power plant at Kutch. The company has a capacity of 100.5 MW in the wind power segment which it plans to enhance by 50MW annually taking the capacity of 200.5 MW by 2014 at an investment of ~ ` 600 crore. We expect the plants to continue to operate at PLFs of 20-22% and boost revenue and profitability.

Power Revenue & EBITDA Margin (%)

-70.0

-60.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY13E FY14E

(Rs.C

rore

)

Revenue EBIT Margin RHS (%)



July, 2012


Bauxite mining and other business to add further value

Besides lignite, GMDC is also engaged in the mining of minerals like bauxite, manganese, limestone, multi metal etc. On the back of ramp up in production at Gadhsisa mines, we expect bauxite segment revenues to grow at a CAGR of 57.7% to `193 crore over the forecast period. The other businesses are at an emerging stage and expected to take considerable time to prosper.

GMDC and NALCO has formed a 26:74 JV to set up an alumina plant and aluminum smelter project in Kutch, Gujarat at an investment of `12,000 crore. GMDC is expected to invest ` 170 crore in cash and ` 170 crore in the form of annual bauxite

supply of ~ 3 MMT. Post commissioning of operations in FY16, this is likely to generate additional revenue of ` 200 crore for the company with an operating margin

of 40%.

GMDC also derives revenues from the mining of bauxite, manganese ore, fluorspar, silica, limestone among others. Though their contribution to revenues are miniscule (compared to lignite and power), however the immense growth opportunities and GMDC’s continuous efforts to monetize them makes these minerals lucrative from the long term perspective.

Ramp up in bauxite volumes, JV with NALCO to boost revenues

On the back of ramp up in production at the existing mine, we expect the volumes to grow from the current 0.9 MT to 2.0 MT by FY14. This should help revenues from this increased volume to grow at a CAGR of 57.7 % to `193 crore by FY14.

GMDC and NALCO has formed a 26:74 JV to set up an alumina plant and aluminum smelter project in Kutch, Gujarat at an investment of `12,000 crore. GMDC is

Bauxite Production & Growth (%) Bauxite Revenue & Growth (%)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0.0

0.5

1.0

1.5

2.0

2.5

FY 10 FY 11 FY 12 FY 13E FY 14E

(In

. M

T)

Bauxite Business Growth (%) RHS

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

0

50

100

150

200

250

FY 11 FY 12 FY 13E FY 14E

Rs.C

rore

Bauxite Revenue Growth (%)

Source: GMDC, Ventura Research Source: GMDC, Ventura Research


July, 2012


expected to invest ` 170 crore in cash and ` 170 crore in the form of annual bauxite supply of ~ 3 MMT. Post commissioning of operations, GMDC is likely to witness a sharp ramp up in bauxite volumes from the current 0.8 MMT to 5 MT by 2016. This is likely to generate additional revenue of ` 200 crore for the company with an operating

margin of 40%.

Financial performance

Supported by higher volumes and prices, GMDC posted a revenue growth of 15.6% to ` 537 crore in Q4FY12. Operating profit in the same period was higher by 21% and

stood at ` 246.1 crore led by better pricing mix. Consequently, EBITDA margin stood

at 45.8%, higher by 190 bps yoy. Lower interest costs on account of major debt repayment & lower effective tax rate further boosted the net profit which grew by 41% to ` 158.6 crore in Q4FY12.

Financial outlook On the back of ramp up of volumes at Bhavnagar and Tadkeshwar mines, new mines coming on stream and significant price hikes, we expect GMDC’s revenues to grow at a CAGR of 27.1% to ` 2636.2 crore by FY14. Consequently, we forecast the operating

profit to grow at a CAGR of 27.6% over FY12-14 to ` 1238.9 crore. While, EBITDA margins would remain flat at 46% over the forecast period with upside risk. In our view, the worst in power business is already factored in and we believe the power business to return to profitability in FY14. Interest costs are also likely to come down significantly due to major debt repayment. Consequently, the PAT would grow at a CAGR of 23.7% to ` 745.3 crore by FY14 as compared to `487 crore in FY12.

Quarterly Financial Performance Particulars Q4FY12 Q4FY11 FY12 FY11

Net Sales 537.0 464.6 1630.7 1421.0

Growth % 15.6

14.8

Total Expenditure 290.9 260.8 870.2 767.0

EBIDTA 246.1 203.8 760.4 654.0

EBDITA Margin % 45.8 43.9 46.6 46.0

Depreciation 32.0 29.4 108.3 93.0

EBIT (EX OI) 214.1 174.3 652.1 561.1

Other Income 23.7 21.9 73.4 38.8

EBIT 237.8 196.3 725.5 599.9

Margin % 44.3 42.2 44.5 42.2

Interest 0.9 4.8 7.8 15.3

Exceptional items 0.0 0.0 0.0 0.0

PBT 236.8 191.4 717.6 584.6

Margin % 44.1 41.2 44.0 41.1

Provision for Tax 78.3 78.7 230.9 209.8

PAT 158.6 112.7 486.8 374.8

PAT Margin (%) 29.5 24.3 29.8 26.4

Source: GMDC , Ventura Research


July, 2012


Valuation At the CMP of `187, GMDC is trading at 5.9x and 4.8x its estimated EV/ EBITDA for

FY13 and FY14, respectively. We initiate coverage on GMDC as a BUY with a Price Objective of ` 255 (6.5x FY14 EV/EBITDA) over a period of 18 months. Considering

the increasing production, adequate reserves life of its mines and pricing power, we expect GMDC to continue to register robust growth. The bauxite mining business is also witnessing good growth and the JV with Nalco for setting up an alumina plant and aluminum smelter project, augurs well in terms of long term revenue visibility. However, we have not factored any business revenue from this JV in our earning model.

Revenue, EBIDTA & PAT Margin (%)

0%

10%

20%

30%

40%

50%

60%

0

500

1000

1500

2000

2500

3000

FY 10 FY 11 FY 12 FY 13E FY 14E

Rs.C

rore

Revenue EBITDA Margin (%) PAT Margin (%)



July, 2012


P/E

0

50

100

150

200

250

300

350

400

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

CMP 6.5X 9.75X 13X 16.25X 19.5X


P/BV

0

50

100

150

200

250

300

350


CMP 0.75X 1.375X 2X 2.625X 3.25X


EV/EBITDA

0

2000

4000

6000

8000

10000

12000


EV 2.5X 4.16X 5.82X 7.48X 9.14X



July, 2012


Financials and Projections

Y/E March, Fig in Rs. Cr FY 2011 FY 2012 FY 2013e FY 2014e Y/E March, Fig in Rs. Cr FY 2011 FY 2012 FY 2013e FY 2014e

Profit & Loss Statement Per Share Data (Rs)

Net Sales 1414.8 1630.7 2154.4 2636.2 EPS 11.8 15.3 19.0 23.4

% Chg. 15.3 32.1 22.4 Cash EPS 14.7 18.7 22.9 28.1

Total Expenditure 760.8 870.2 1151.3 1397.3 DPS 3.0 3.0 3.0 3.0

% Chg. 14.4 32.3 21.4 Book Value 52.5 64.3 79.8 99.8

EBITDA 654.0 760.4 1003.1 1238.9 Capital, Liquidity, Returns Ratio

EBITDA Margin % 46.2 46.6 46.6 47.0 Debt / Equity (x) 0.1 0.0 0.0 0.0

Other Income 38.8 73.4 38.1 39.3 Current Ratio (x) 1.2 1.5 1.6 1.5

Exceptional items 0.0 0.0 0.0 0.0 ROE (%) 22.4 23.8 23.8 23.5

PBDIT 692.8 833.8 1041.2 1278.3 ROCE (%) 33.7 35.7 36.8 36.9

Depreciation 93.0 108.3 126.4 148.7 Dividend Yield (%) 1.6 1.6 1.6 1.6

Interest 15.3 7.8 2.0 2.0 Valuation Ratio (x)

PBT 584.6 717.6 912.8 1127.6 P/E 15.9 12.2 9.9 8.0

Tax Provisions 209.8 230.9 309.4 382.2 P/BV 3.6 2.9 2.3 1.9

Reported PAT 374.8 486.8 603.4 745.3 EV/Sales 4.2 3.6 2.7 2.2

PAT Margin (%) 26.5 29.8 28.0 28.3 EV/EBIDTA 9.0 7.7 5.9 4.8

Efficiency Ratio (x)

Manpower cost / Sales (%) 10.7 6.6 5.8 5.8 Inventory (days) 17.6 14.6 15.0 15.0

Other Exp / Sales (%) 0.2 0.3 0.3 0.3 Debtors (days) 9.2 9.9 10.0 10.0

Tax Rate (%) 35.9 32.2 33.9 33.9 Creditors (days) 94.9 118.7 110.0 110.0

Balance Sheet Cash Flow statement

Share Capital 63.6 63.6 63.6 63.6 Profit After Tax 374.8 486.8 603.4 745.3

Reserves & Surplus 1606.2 1982.1 2474.6 3109.0 Depreciation 93.0 108.3 126.4 148.7

Minority Interest & Others 0.0 0.0 0.0 0.0 Working Capital Changes -56.0 -12.4 -194.4 -129.7

Total Loans 133.0 0.0 0.0 0.0 Others -1.7 -99.6 0.0 0.0

Deferred Tax Iiability 253.7 293.0 293.0 293.0 Operating Cash Flow 410.0 483.1 535.4 764.3

Total Liabilities 2056.5 2338.7 2831.2 3465.6 Capital Expenditure -269.2 -336.2 -426.0 -530.5

Goodwill 0.0 0.0 0.0 0.0 Change in Investment 0.0 0.0 0.0 -132.6

Gross Block 2236.2 2584.9 3010.2 3540.2 Cash Flow from Investing -269.3 -336.2 -426.0 -663.1

Less: Acc. Depreciation 718.8 827.1 953.6 1102.2 Proceeds from equity issue 0.0 0.0 0.0 0.0

Net Block 1517.4 1757.8 2056.6 2437.9 Inc/ Dec in Debt -83.0 -133.0 0.0 0.0

Capital Work in Progress 18.8 6.3 7.0 7.5 Dividend and DDT -110.9 0.0 -110.9 -110.9

Investments 132.6 132.6 132.6 265.3 Cash Flow from Financing -193.9 -133.0 -110.9 -110.9

Net Current Assets 376.4 442.0 635.0 755.0 Net Change in Cash -53.2 13.9 -1.5 -9.7

Misc.Expenditure 11.2 0.0 0.0 0.0 Opening Cash Balance 95.8 42.6 56.5 55.0

Total Assets 2056.5 2338.7 2831.2 3465.6 Closing Cash Balance 42.6 56.5 55.0 45.2

Ventura Securities Limited Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079 This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation.

initiating coverage gmdc_ltd_buy_for_36_per_appreciation

Business

gujarat lignite

mining lignite

fy14 evebitda

wind power segment

sensex power business

business revenue

fy13 fy14

mw solar power plant