Gujarat Mineral Development Corporation (GMDC) is one of the largest miners of lignite in the country, focusing mainly into the mining of lignite, bauxite and manganese ore. GMDC is owned 74% by the Gujarat government and is one of the leading mining and mineral processing companies in India, supplying lignite to various industrial units that include textiles, chemicals and ceramics. The company’s operations and client base are predominantly in the state of Gujarat, where its mined lignite acts as a substitute to coal, which is otherwise expensive due to the involvement of high transportation cost.
The company operates five lignite mines in the country and its biggest strength is the uninterrupted demand for lignite in Gujarat, giving it a necessary pricing power. GMDC’s core competency is the production and sale of lignite in Gujarat, where it accounts for around 75% of the company’s overall sales. It also has a presence in the power sector, with wind, solar, and thermal power plants and enjoys exclusive lignite extraction rights in Gujarat. For the uninitiated, lignite is an inferior coal used as an industrial fuel and offers huge cost savings. The company’s key end users are the power, textiles, bricks, paper and paper board industries. Gujarat being one of the most industrial states in India offers a good market for the goods it produces.
GMDC has a quasi monopoly in lignite extraction and offers lignite for various industrial units in the state including power companies. Amongst all its products, lignite is the biggest contributor to the company’s revenue and accounts for around 75% of the revenues. Lignite referred to as Brown Gold is an alternative to coal and is in great sustained demand all across the world mainly in power generation, cement and urea manufacturing. It is cheaper than competing fuels like natural gas. GMDC operates in two segments—mining and power—where lignite and bauxite dominate the mining portfolio in terms of volume. The second quarter of FY18 has been the first quarter under the new GST regime and with lower taxation on lignite, there is huge attractiveness vis-à-vis other competitive fuels.
GMDC lignite remains extremely competitive versus alternatives and this may also spur price hikes in future. For the nine months ending December 2017, net profit stood at Rs 334.54 cr on sales of Rs 1,482 cr, while the EPS for the first nine months stands at Rs 10.52. On a equity base of Rs 63.6 cr (promoters’ stake 74%, FII/DII stake 15.61%), the FY18 EPS on a Rs 2 paid up share should be over Rs 10. The company has been debt free since 2012, which has also helped in the rise of its net margin. Low-cost lignite operations, a steady expansion track record and healthy growing captive market in the state of Gujarat make GMDC a good bet in the mining space. Being a monopoly player for lignite in Gujarat, GMDC will be in a strong position to capitalise on buoyant demand for lignite in the state.
GMDC has good scope for growth, as there is high demand for mineral products on account of growth in the manufacturing sector in the country. For a cyclical business—which seems to be coming out of the trough of the cycle, is almost debt free, has offered average return on equity of 19% over the last five years and positive operating cash flows—the current valuations seem quite attractive. The GMDC stock currently quoting at Rs 120 can appreciate to Rs 180 in the next one year.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.