GMDC Q2 Results 2008 Analysis

Gujarat Mineral Development Corporation GMDC) is a Gujarat State government undertaking engaged in the business of lignite, bauxite and fluorspar mining as also power generation units based on lignite. Being a substitute for coal, lignite has a huge potential. When crude scaled new highs and coal prices touched the sky, lignite prices were also ruling the roost. But now that prices of crude and coal have come down, price of lignite has also come down, henceforth the company might not be able to show the kind of realizations it did during the peak time.

The financial performance of the company for the second quarter ended 30th September 2008 has not been good. The fall on a QoQ basis has been quite drastic wherein net sales fell 50% at Rs.135.28 crore and PAT wads down 74% at Rs.18.64 crore. YoY, the fall is there but not as steep – net sales was down 25% and PAT was down 55%. Cyclically also, second quarter is always the worst and then the company more than makes up for it in remaining two quarters, with Q4 being the best.

We have recommended buying into this stock time and again, when it was cum-bonus and also prior to the bonus being declared. Those who had followed would have surely got the advantage of capital appreciation. Though the stock price has today touched Rs.31 levels, there is no need to fret as the long term story in the stock remains intact.

The company is has ploughed back all the bounty it is earning into building up more. It is leveraging all the coal capabilities into cement, power, SEZ and port in Gujarat. The company is presently producing about 80 lakh MT of lignite at its three mines. New mines have been developed at the various locations at Surat to cater to South Gujarat where estimated annual production would be 10 lakh MT. 10 lakh MT of lignite production at Amod near Bharuch would fully contribute in FY09. 30 lakh tonne of lignite production is estimated from Bhavnagar mines to cater to Saurashtra region and Central Gujarat. So, in FY 09, the production of lignite will get increased by about 40%. The company also has 250 MW power plant in operation based on lignite.


Lignite referred to as brown gold, is an alternative for coal, which is in great demand, as natural resources are becoming scarce all over the world.
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GMDC- very smart move

According to Macquarie Research Commodities, strong Indian and Japanese demand for thermal coal, coupled with the move of China from a significant net exporter to a balanced state in 2007 have been mainly responsible for the rising coal prices. Prices are expected to stay high or even scale newer heights in the coming months. And even for this, like all, the report blames India and has stated categorically that large additions to steelmaking capacity in India and Brazil in the coming years could also significantly boost demand and keep the coking coal market tight. This may not augur too well for companies using coal as a raw material but for those with coal reserves, it means boom time is here to stay. Surely Gujarat NRE Coke would be laughing all the way to the bank and must be laughing quite often as the trips to the bank would have surely gone up.

Right now coal is at a high and those owning mining rights with large reserves are the kings. The core metals which are ored – like iron, bauxite are all very much in demand. Infact the mantra is – own a mine and all riches will be yours. In that context, GMDC has been a winner for some time now. It has huge reserves of coal and the way the stock price has been zooming on the bourses is indicative of the goldmine on which it is currently sitting.

The best part about GMDC getting all the riches is that it is ploughing back all the bounty it is earning into building up more for the company. It is leveraging all the coal capabilities into cement, power, SEZ and port in Gujarat. How does it plan to do that? It is getting into a JV with cement unit and another with a power unit. The cement unit would also develop a mineral based SEZ and a port with GMDC. Thus GMDC would have a captive coal customer in each cement plant as well as power plant and the power plant would have captive customer in cement plant.

This is a very smart move on the part of GMDC as it would ensure that even when the demand for coals cools down from the levels right now, GMDC would not be impacted much as it is has already made provisions to book its entire future reserves. This is one ant, which has been busy all through.