The global downturn in the coal sector continues to weigh on the stocks of mining companies such as Gujarat Mineral Development Corporation (GMDC). The company produces lignite, a type of brown coal. Its share price has fallen sharply, from ₹142 in October 2014 when we gave a buy recommendation to ₹75 currently. One reason was the 20 per cent fall in global coal prices in this period. Also, the company faced production issues in its mines which led to lower output.

GMDC’s stock trades currently at about five times its trailing 12-month earnings. This is at a discount to its three-year historical valuation of 8-10 times. It is also cheaper than its closest peer Neyveli Lignite Corporation which trades at an earnings multiple of seven times.

While it may appear a bargain, investors can exit the stock. The company’s revenue and profits dipped 18 and 24 per cent respectively, in the first half of 2015-16 compared with the year-ago period; growth may remain subdued in the near term as realisations and volumes are unlikely to revive soon.

Revenue pressure

Sale of lignite is GMDC’s mainstay, accounting for over 75 per cent of revenue. This segment may continue to remain weak due to three reasons. One, lignite prices are typically about 20 per cent lower than black coal and the steep downward spiral in international coal prices will impact realisations.

Prices were reduced by about 15 per cent on an average for various grades in August 2015 and any further cuts to match falling global coal prices may dent revenue.

Two, demand appears to be soft and, recently, the restriction placed on GMDC to sell to only end-users was removed. The company can sell lignite in the open market and the management expects that volumes will increase by 25 per cent.

This may be easier said than done as the relaxation could be an indication of demand softness from its existing customer base of primarily small and medium scale industries in Gujarat. So, an increase in volumes could at best make up for the demand weakness.

Drop in production

Three, the company continues to face operational issues. Lignite output has been declining — from 11.3 million tonnes (mt) in 2012-13 to 8.7 mt in 2014-15.

The drop in output was primarily due to operational issues in its existing mines. Ramp-up in its new mine in Umarsar from March 2015 was expected to boost volume.

But this has not happened. In the June 2015 quarter, GMDC’s production dropped 30 per cent Y-o-Y to 1.8 mt and volumes in the September quarter were only 1.4 mt compared to 1.6 mt in the same period last year.

Besides lignite, the company sells minerals, such as bauxite, limestone and manganese. Weak mineral prices may impact the prospects of these segments. Also, plans for an alumina refinery (through a joint venture with Nalco) are still in the early stages.

GMDC also derives about 20 per cent of its revenue from its 250 MW thermal and 150 MW wind power plants. A 500 MW thermal power plant in Bhavnagar through a joint venture is also in the works.

The company is debt-free. GMDC has been paying a regular dividend of ₹3 per share.

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