Why the worst is behind for Gujarat Mineral Development Corporation

Gujarat Mineral Development Corporation (GMDC), the largest seller of lignite in India, was going through a lean patch. Its net profit in 2013-14 fell to Rs 439 crore from Rs 601 crore in 2012-13. But now, due to several concrete measures taken by the company, things have started improving. Though on a low base, it could report a year-on year (y-o-y) increase of 44 per cent in lignite volume growth, in the second quarter of 2014-15. This implies that the worst is behind GMDC. It could also report a modest y-o-y net profit growth of 19 per cent, despite a one-off provision of Rs 18 crore related to the removal of hard strata at the firm’s Tadkeshwar mines.

With the Umarsar lignite mine also starting operation in the fourth quarter, its total lignite volume should be above 10 million tonnes in 2014-15, a yo-y growth of 19 per cent. With volume expansions at its other lignite mines providing further growth visibility, over the medium to long-term period, GMDC, once again, is becoming a structural growth story.

Bauxite mining, another forte of GMDC, also continues to show improvement. Analysts expect the company to be able to achieve its volume target of 14 million tonnes in 2015-16. The company is also hiking prices to offset the rise in costs.

With a low plant load factor (PLF) of around 60 per cent now, there is enough scope for improvements at its 250 MW Akrimota thermal power plant. Since this power plant is using the lignite produced by GMDC mines, it will be a beneficiary of the revival in lignite production. GMDC already has a wind power capacity of 150 MW and will be adding another 50 MW to its portfolio soon. It is also planning to establish a 5 MW solar plant on the mined-out reclaimed area of Panandhro lignite mines.

GMDC is one of the most profitable public sector undertakings of the Gujarat government. It is expected that the firm will reach its previous glory again. As per consensus estimate, it is expected to report a net profit of Rs 607 crore in 2015-16, Rs 6 crore higher than its net profit in 2012-13. The massive correction in the counter in the past six months has also brought its valuations down to reasonable levels. Since it is now quoting only at 8.7-times its historical earnings per share, long-term investors can consider adding GMDC to their portfolio.

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