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GMDC – Stock of the Month (March 2015)

25 February, 2015

Price: Rs. 117.65

gmdcGujarat Mineral Development Corporation Limited (“GMDC” or the “Company”) was incorporated in 1963 to support industrial growth in the state of Gujarat. From operating a small silica sand plant, GMDC has grown exponentially into a diversified companyis. The Company is engaged in the mining of lignite, bauxite, fluorspar, and manganese ore and power generation. The Company operates in two segments: Mining and power generation. Currently GMDC operates five lignite mines at Panandhro, Tadkeshwar, Mata-no-Madh, Rajpardi and Bhavnagar.

INVESTMENT RATIONALE

Pricing Power | Monopoly Status in Gujarat

GMDC is the leading state owned mining company in Gujarat, contributes significantly to Lignite production in the state. GMDC has exclusive ownership of around 90 % of the total lignite production capacity in the state. For Bauxite, the ownership is around 75-80 %.  Cheaper than coal, this energy resource is a boon for the local industries in Gujarat which has no known coal reserves, with the nearest coal mine 700 km away, which make it unviable to transport. Absence of any other merchant miner in the state gives GMDC a monopoly status and enables the Company to exhibit strong pricing power due to the prevalence of a robust demand scenario in the industry state of Gujarat (realizations have grown at a 9.9% CAGR over FY2006-14). The increase in the price of lignite in near future will help the Company to improve its bottomline i.e. net profit.

Diversification – Foray in Power Production

GMDC’s foray in power production has provided a new avenue for the Corporation to expand. With almost 66% of Indian population without sufficient access to electricity, the demand for power is expected to increase. Currently the Company has established capacity to produce 250 MW thermal power and working with other public sector units in joint venture to set up a 500-MW power plant in Bhavnagar. In addition, the Company operates 150 MW of wind power, with a plan to extend it by 50 MW in the coming year and 5 MW solar power generation plant installed at Panandhro in Kutch.

The Company is also planning to expand its exploration and mining business in regions outside India which will prove to be a great opportunity for GMDC. We believe that with strong financial performance, the Company has the required resources and capability to explore the outside market. This effort will increase the profitability margins of the Company.

Strong Financial Position

GMDC’s businesses are highly profitable, with operating margin of about 47.82 % for FY 2014 and ~40 % for FY 2015 Q3.  In the recent December quarter, the company’s revenue increased 12.15 % year-on-year to ₹326.37 Cr. With zero debt on its accounts since FY 2012, the return on capital employed is around 21 %. GMDC has been distributing steady dividends of 150% over the last 4 financial years on a face value of Rs. 2 per share.

At CMP of Rs. 117.65 (25th February, 2015), GMDC is trading at a P/E of 6.23x and has a dividend yield of 2.55% at current market price.  This we believe makes GMDC as one of the best long term stocks in the current market scenario.

INVESTMENT CONCERNS

Large Investment in Wind Power Plants

GMDC is currently in the process of expanding its wind power capacity in a large way with 50 MW of capacity coming on stream every year for the next few years. Foray into this business can prove to be margin eroding for the company as wind power plants generally run on very low plant load factors (PLFs). The management has also indicated in the annual report that they would invest further in wind energy only if minimum required IRR is achievable.

Intense Competition

Issuance of captive mining licenses in coal mining is a new trend in the mining industry, which promotes private sector participation in the sector. Growing presence of private companies in the sector will lead to intense competition for the state owned companies like GMDC. Thus in order to sustain its leadership position, GMDC has to improve its operational efficiency by improving high volume growth in mines and high plant load factors in power plants.