India Equity Research Metals & Mining March 8, 2022

GMDC
COMPANY UPDATE

KEY DATA
Rating BUY
A metamorphosis to strengthen the core
Sector relative Neutral
Price (INR) 160
12 month price target (INR) 245 We recently met Mr. Roopwant Singh, IAS, GMDC’s MD to gain insights
Market cap (INR bn/USD bn)
Free float/Foreign ownership (%)
51/0.7
26.0/2.5
into the strategy, turnaround plans and long term prospects of the
What’s Changed company. In our view, management’s focus on harnessing the latent
Target Price 
Rating/Risk Rating  strengths of the company in adjacent minerals and exploring new
INVESTMENT METRICS opportunities is expected to fetch good returns for the shareholders.
100 Based on the series of price hikes taken by the company and volume
75
trajectory, we raise our FY22E/FY23E EBITDA by 4%/22%. Further, we
50
25 raise the multiple to 5x (earlier 3x), factoring the sustained narrowed
0 price discount to substitutes and possible favourable outcome of other
Sales Growth EPS Growth RoE PE
(%) (%) (%) (x) opportunities that the company is pursuing. We upgrade the stock to
Metals & Mining GMDC IN Equity
‘BUY’ with revised TP of INR245 (earlier INR125).
FINANCIALS (INR mn) Three pronged focus is reassuring
Year to March FY21A FY22E FY23E FY24E
We are positive on management’s focus on getting the house in order by focusing
Revenue 13,392 27,093 36,628 33,013
on its existing business and key areas: i) lignite pricing; ii) lignite volume ramp-up;
EBITDA (66) 6,647 11,965 11,734
Adjusted profit (4,308) 5,589 9,606 9,584
and iii) thermal power plant profitability. As a result of dynamic pricing in lignite, the
Diluted EPS (INR) (13.5) 17.6 30.2 30.1 frequency of price hikes has been almost fortnightly since Aug-21 (14 hikes in all)
EPS growth (%) nm nm 71.9 (0.2) compared to just three price hikes in two years prior. On the volume front, the ramp-
RoAE (%) (5.0) 13.2 19.5 16.5 up has been quite satisfactory with the target of 8.5mt in FY22 and 10mt in FY23,
P/E (x) nm 9.1 5.3 5.3 compared to a mere 6mt in FY21. Despite having limited levers regarding thermal
EV/EBITDA (x) (547.5) 5.0 2.5 2.1 power plant, management looks to stymie its losses to the maximum extent possible.
Dividend yield (%) 1.2 1.2 1.2 1.2 In our view, the systems/processes for dynamic pricing and volume ramp up is likely
to lift its EBITDA to INR12bn by FY23E compared to loss of INR66mn in FY21.
PRICE PERFORMANCE Taking bull by the horns
175 62,000 In our view, the appointment of Mr. Rajiv Gupta (Add. Chief Secretary of the
150 59,000
Industries and Mines Department, Gujarat) as the Chairman and Mr. Roopwant Singh
125 56,000
100 53,000 (The Commissioner of Geology and Mining, Gujarat) in June-21 is pivotal in the
75 50,000 company’s turnaround plans. They have taken steps to maximise the strength of
50 47,000 existing operations, develop the adjacent businesses and explore the promising rare
Mar-21 Jun-21 Sep-21 Dec-21 Mar-22
earth business. While some of the endeavours are still in the bud, we believe that
GMDC IN Equity Sensex
structured and earnest approach is likely to result in long term shareholder value.

Outlook and valuations: Revival of fortunes; upgrade to ‘BUY’

Explore: In our view, GMDC is on the right track, as the vision of the new chairman and MD is
likely to fructify into: i) strengthening of existing business; ii) sharpened focus on
price/volume and align it dynamically to the market conditions; iii) renewed
emphasis on adjacent businesses – bauxite, bentonite and silica sand. We also see a
possible foray into rare earths as yet another value enabler for the company.
Financial model Podcast
Taking cognizance of recent price hikes and evident volume ramp up in 9MFY22, we
raise our FY22E/FY23E EBITDA by 4%/22%. We raise our multiple to 5x (earlier 3x) in
line with its past 10-years average owing to structurally higher prices and possibility
of new revenue streams. We upgrade the stock to ‘BUY’ (earlier ‘HOLD’) with a
Corporate access Video revised TP of INR245 (earlier INR125). We perceive the change of top management,
sharp moderation in international coal prices and non-accrual of benefits of possible
rare earth business to GMDC as the key risks for the stock.
Amit Dixit
+91 (22) 6620 3160
AmitA.Dixit@edelweissfin.com

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
 GMDC

Financial Statements
Income Statement (INR mn) Balance Sheet (INR mn)
Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E
Total operating income 13,392 27,093 36,628 33,013 Share capital 636 636 636 636
Gross profit 7,437 21,103 30,084 25,772 Reserves 39,370 44,196 53,039 61,860
Employee costs 1,308 1,439 1,468 1,497 Shareholders funds 40,006 44,832 53,675 62,496
Other expenses 960 1,236 1,419 1,390 Minority interest 0 0 0 0
EBITDA (66) 6,647 11,965 11,734 Borrowings 44 44 44 44
Depreciation 942 896 1,086 1,379 Trade payables 1,739 3,457 3,567 2,040
Less: Interest expense 20 20 20 20 Other liabs & prov 1,147 1,147 1,147 1,147
Add: Other income 1,513 1,925 2,300 2,793 Total liabilities 48,734 55,279 64,232 71,526
Profit before tax (3,480) 7,656 13,159 13,128 Net block 12,403 13,307 18,220 22,841
Prov for tax (1,467) 2,067 3,553 3,545 Intangible assets 3,426 3,426 3,426 3,426
Less: Other adjustment 0 0 0 0 Capital WIP 56 56 56 56
Reported profit (2,013) 5,589 9,606 9,584 Total fixed assets 15,885 16,789 21,702 26,323
Less: Excp.item (net) 2,294 0 0 0 Non current inv 2,920 2,920 2,920 2,920
Adjusted profit (4,308) 5,589 9,606 9,584 Cash/cash equivalent 14,986 17,999 21,652 26,466
Diluted shares o/s 318 318 318 318 Sundry debtors 1,413 3,040 3,382 2,045
Adjusted diluted EPS (14) 18 30 30 Loans & advances 106 106 106 106
DPS (INR) 2.0 2.0 2.0 2.0 Other assets 8,620 9,619 9,665 8,861
Tax rate (%) 42.2 27.0 27.0 27.0 Total assets 48,734 55,279 64,232 71,526

Important Ratios (%) Free Cash Flow (INR mn)

Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E
EBITDA/t - Lignite (INR) 54.1 805.7 1,253.3 1,090.1 Reported profit (2,013) 5,589 9,606 9,584
EBITDA/unit - Power (Rs) 0.4 0.4 0.3 0.4 Add: Depreciation 942 896 1,086 1,379
Employee (% of Sales) 9.8 5.3 4.0 4.5 Interest (net of tax) 20 20 20 20
EBITDA margin (%) (0.5) 24.5 32.7 35.5 Others 2,902 (1,925) (2,300) (2,793)
Net profit margin (%) (32.2) 20.6 26.2 29.0 Less: Changes in WC (351) (908) (277) 614
Revenue growth (% YoY) (11.9) 102.3 35.2 (9.9) Operating cash flow 1,499 3,672 8,135 8,804
EBITDA growth (% YoY) nm nm 80.0 (1.9) Less: Capex (117) (1,800) (6,000) (6,000)
Adj. profit growth (%) nm nm 71.9 (0.2) Free cash flow 1,382 1,872 2,135 2,804

Assumptions (%) Key Ratios

Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (7.3) 9.5 7.0 6.5 RoE (%) (5.0) 13.2 19.5 16.5
Repo rate (%) 4.0 4.0 4.3 5.3 RoCE (%) 1.3 18.1 26.7 22.6
USD/INR (average) 74.2 74.5 76.0 75.0 Inventory days 59 90 112 82
Sales (mT) 6.0 8.6 9.9 11.0 Receivable days 38 30 32 30
Realisation (INR/t) 2,016.4 3,124.2 3,826.3 2,893.9 Payable days 95 158 196 141
PLF for ATPS (%) 32.3 40.0 45.0 45.0 Working cap (% sales) 50.1 28.1 21.5 22.0
Power Units (mKWh) 982.0 1,181.9 1,291.4 1,344.2 Gross debt/equity (x) 0 0 0 0
Realisations (INR/unit) 2.0 2.0 1.9 2.0 Net debt/equity (x) (0.4) (0.4) (0.4) (0.4)
Mining Cost (INR/t) 991.9 696.9 662.1 658.9 Interest coverage (x) (51.5) 293.9 555.9 529.1

Valuation Metrics Valuation Drivers

Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) nm 9.1 5.3 5.3 EPS growth (%) nm nm 71.9 (0.2)
Price/BV (x) 1.3 1.1 0.9 0.8 RoE (%) (5.0) 13.2 19.5 16.5
EV/EBITDA (x) (547.5) 5.0 2.5 2.1 EBITDA growth (%) nm nm 80.0 (1.9)
Dividend yield (%) 1.2 1.2 1.2 1.2 Payout ratio (%) nm 11.4 6.6 6.6
Source: Company and Edelweiss estimates

2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
 GMDC

What is working for the company?

Leadership
GMDC is undergoing a metamorphosis under the leadership of new Chairman, Mr.
Rajiv Kumar Gupta and new MD, Mr. Roopwant Singh. In our view, the experience
of Mr. Gupta in turning around the PSUs in Gujarat and Mr. Singh’s experience as
commissioner of Geology and Mining augers well for developing and honing the
latent potential of the company.

GMDC held its maiden analyst meet in Aug-21, where Mr. Singh laid out the broad
contours of the company strategy: i) harnessing the adjacent value streams; ii)
dynamic pricing; iii) volume ramp-up; and iv) making use of the existing resources of
the company, primarily its land. The company has appointed BCG as strategic
consultant and A Kearney as advisor to turn around the thermal power plant.

Further, the company has advertised for the positions of power, silica sand, bauxite
and cement sector experts. This has been done to further strengthen these potential
business verticals. In our view, the spate of price hikes taken (14 in all) since Aug-21
to take advantage of prevailing energy prices is the most visible change for GMDC.

The three pronged strategy

Our interaction with Mr. Gupta and Mr. Singh suggests that there is a three-pronged
strategy in place:

1. Short-term: Remove inefficiencies in the system. Empower managers to deliver

and make business heads earnings conscious

2. Medium-term: Increase non-lignite revenue to 50% in order to improve the ESG

rating and diversify the earnings base. Currently lignite contributes 80% to the
top-line. Management has engaged consultants for exploring other avenues for
growth. The company is planning to develop 6 new mines over next 1.5-2 years
to ensure that production stays above 10mtpa. Further, there is a distinct focus
on value added products in Bauxite and other minerals.

3. Long-term: Explore opportunities in rare earth minerals. In a reply to a question

in the Lok Sabha on 2 February, 2022, the government said that as on Jan-22
end, rare earth oxide reserves in Ambadongar area of Chota Udepur district in
Gujarat is pegged at 737,283 tonnes. This is more than twice the initial estimate
of 346kt, mentioned by the Atomic Minerals Directorate in a report dated Nov-
20. In the same reply, the government has mentioned about greater self-
reliance in rare earth production and is targeting increasing rare earth oxide
mining capability by 3x by CY32. The biggest advantage here is that rare earth
deposits are contiguous to fluorspar deposits that GMDC is currently mining.
Hence, we believe that GMDC will have a major role to play in any such
government’s endeavour.

We identified five major areas that the company is focusing on that could catapult it
to the next stage: i) Dynamic pricing; ii) Lignite volume ramp up; iii) Appointment of
consultants to chart the next areas of growth; iv) Manpower augmentation; and v)
Possible foray in rare earths. The chairman made it clear during the interaction that
all the new revenue streams would be fostered organically, and hence we expect
that the shareholders are likely to get the entire benefit.

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 GMDC

Area 1: Pricing methodology

The management has started taking number of micro-measures into consideration
while deciding the price of lignite through both internal and external focus. Key
points: i) The company analyses the landed cost of coal – region-wise, trader-wise
and substitutes-wise before coming up its pricing every fortnight. ii) Targeted quota
allocation, resulting in booking of entire quantity within two days. iii) Mapping
products with consumption centres resulting in better distribution of lignite.

GMDC has embarked on a series of price hikes since Aug-21, riding on the back of
significant energy inflation across the world. GMDC’s lignite price is still at a large
discount to the prices of substitutes – petcoke and imported coal (from Indonesia
and South Africa). Coal India is not a competitor for GMDC due to its location.

Lignite price vs. substitutes

5.0

4.0
(INR/mnCal)

3.0

2.0

1.0

0.0
Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21
Sep-21
Mar-15

Sep-15
Dec-15
Mar-16

Sep-16
Dec-16
Mar-17

Sep-17
Dec-17
Mar-18

Sep-18
Dec-18
Mar-19

Sep-19
Dec-19
Mar-20

Sep-20
Dec-20
Mar-21

Dec-21
Lignite (GMDC, Mata-No-Madh) Petcoke Domestic
SA - RB1 (CFR, India) Domestic coal (CIL, G11)

Source: Company, Edelweiss Research, Bloomberg

The ongoing tensions between Russia and Ukraine presents an opportunity for the
company to take further price hikes. As a result of the recent uptick in global coal prices,
GMDC’s lignite is still at a significant discount to the landed price from South Africa.
Compared to petcoke and thermal coal from Indonesia, it is at a discount of 45-50%.

Discount of GMDC prices wrt substitutes

54%

27%

0%

-27%

-54%

-81%
Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21
Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21
Mar-15

Sep-15

Mar-16

Sep-16

Mar-17

Sep-17

Mar-18

Sep-18

Mar-19

Sep-19

Mar-20

Sep-20

Mar-21

Sep-21

Petcoke Domestic Imported Coal (Indonesia)

Imported coal - RB1

Source: Company, Edelweiss Research, Bloomberg

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 GMDC

Area 2: Lignite volume ramp up

We estimate GMDC’s volumes to expand to 10.0mt with 19% CAGR over FY21-24E
due to the addition of new customers and ramp up at existing mine. We expect
Lakhpat Dedadi mine to commence production towards FY23 end and provide
incremental 1mt volume. Besides, Bhavnagar and Umarsar are expected to be
primary drivers of volume growth.

Lignite volume ramp up plan

12.0 10.0
10.6
8.9
9.2
9.6 8.6
7.7
7.0 7.0
7.2 6.0
(mnT)

4.8

2.4

0.0
FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Panandhro Rajpardi Mata no Madh Tadkeshwar
Bhavnagar Umarsar New Mines

Source: Company, Edelweiss Research

The existing mines have reserves of 110mt. While the average life of mines is 12
years, we expect two mines – Umarsar and Rajpardy to exhaust their reserves within
next 4-5 years. Rajpardy is a mine with average GCV of lignite near 5,000kcal, hence
the realisation of this mine is 35% higher compared to other mines on average. We
see the exhaustion of this mine to have a bearing on the profitability. Hence, it is
imperative for the company to develop new mines soon.

Reserves of the existing mines

Mine Reserves (mt) Production- FY22E (mtpa) Life of the mine (years)
Mata no madh 30 3.3 9
Umarsar 10 2.1 4
Rajpardy 2 0.5 4
Tadkeshwar 8 1.3 6
Bhavnagar 60 1.5 40
Total 110 8.6 12
Source: Edelweiss Research, Company

Based on the current mining plan for the six mining blocks (total reserves: 550mt)
allocated to GMDC, we expect substantial volume growth to come only by FY24. That
said, volume growth is also contingent on the imports. The addressable market for
lignite in Gujarat is 20-22mtpa, hence there is enough headroom to pursue growth.
Management is confident that all the six mines are likely to be developed within next
1.5-2 years.

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 GMDC

New mines
Mine Region
Panandhro Extension Kutch
Bharkandam Kutch
Ghala Surat
Lakhpat Punrajpur Kutch
EFG block Valia Bharuch
Damlai Bharuch
Source: Company, Edelweiss Research

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 GMDC

Area 3: Focusing on internal strengths

GMDC has appointed BCG as strategic consultant to overcome challenges by
drawing short term, medium term and long-term strategic roadmaps and through a
corporate transformation. Apart from its mining operations, the company is
considering opportunities in value-added products and activities for further value
creation.

The scope of work envisages fully exploiting existing organisational potential and
coming up with a comprehensive multi-year strategy and roadmap for company’s
growth. Some of the key areas are:

 Mine automation

 Use of ICT in Mining Operations and dispatch

 Mineral pricing, sales and marketing

 Forward integration opportunities

 Product of value-added mineral products

 Strategic use of large land assets

 Rare earth and new blocks of lignite

 Underground coal block gasification

 Beneficiation, downstream and power sector opportunities

 Portfolio expansion and diversification into new products

 Innovative mining mechanism

 Strategic use of coastal shipping for reduction of transportation cost

The scope of work of the strategic consultant is largely two-fold:

 Development and assessment of Alternative options/strategies for performance

turnaround and growth comprising,

o Short-term strategy to reduce existing cash burns and make quick small gains
through operational improvement

o Assessment of status quo position and developing vision for the company

o Detailed assessment for creation of action-oriented roadmap for

transformation taking into account the regulatory, financial and operating
aspects.

 Articulate long-term vision for the company with three tiered roadmap- short
term, medium term and long term, for tapping opportunities.

 Assist GMDC to implement the selected option/strategy

As per the terms of RFP, this work would be complete in a year time. In our view,
this can provide plethora of opportunities to the company to expand its portfolio
and de-link its revenue from purely lignite. However, our current estimates do not
build in any upside from the deliverables of this assignment.

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 GMDC

Some of these opportunities could be in augmenting the existing revenue streams

such as Bauxite, Fluorspar, Bentonite, Silica clay and renewable power. Also, the
company is looking for utilising the limestone in overburden by acting as feedstock
supplier to an existing or a new cement plant. However, we understand that the
company will not set up a cement plant.

Revival of thermal power plant.

The company has appointed AT Kearney as consultant for assessment of strategic
options for revival/disposal of lignite based Akrimota Thermal Power Plant (ATPS) of
GMDC. The detailed scope of work is as follows:

 Development and assessment of strategic options for ATPS plant

o Formulation of rapid action plans to minimize/reduce immediate costs and

reduce cash burns through plant and cost optimisation strategies.

o Assess technical health status of power plant and prepare plant revival plan
subject to suitability of technical health of plant/equipment and possibility
of attaining operational performance of the level of industry
standards/peers.

o Assessment of financial status of power plant and review of the existing

PPA, FSA, O&M and Maintenance contract

o Develop and assess strategic options with a view to either revive or dispose
the power plant.

o Create an implementation roadmap for the preferred options covering key

milestones

 Assistance in implementation of the selected option

o Post the approval of the selected option, GMDC may, at its sole discretion
ask AT Kearney to implement the selected option

The timeline of the Part 1 of the scope is two months while the timeframe for the
Part 2 is expected to be 2-3 months

Management’s focus is to diversify the revenue base of the company from lignite.
Currently, 80% of the revenue comes from lignite. In the near future, the
management intends to bring it down to 50%. In our view, this will not only mitigate
the risk of dependence on a single commodity, but also improve the ESG rating of
the company.

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 GMDC

Area 4: Manpower augmentation

During our interaction, the MD emphasised the need of having a robust organization
structure in place to pursue growth. From our discussion with the team, we
understood that there have been internal transfers from project teams to the
corporate office and vice versa with an objective of having right people at the right
places. Besides, business heads have been given freedom and discretion to take
decisions with the end objective of ensuring earnings growth.

In the scope of work of the strategic consultant, one of the deliverable is corporate
capability build up for strategic focus through
management/corporate/organisational restructuring. In our view, this shows the
focus of the top management on augmenting capacity.

Besides, the company has recently floated a number of positions pertaining to

Kadipani Benefication Plant, Environment expert, Power expert and Cement expert.
This demonstrates the focus of management on harnessing the other business
streams apart from Lignite. The focus on Kadipani is interesting as it pertains to the
fluorspar mining lease at Ambadungar. A Joint Venture company (Swarnim Gujarat
Fluorspar Pvt. Ltd) has been formed by the participation of GMDC, Gujarat
Fluorochemicals Ltd. (GFL) and Navin Fluorine International Ltd. (NFIL) to produce
40ktpa Calcium Fluoride concentrate by erection and commissioning a new plant at
Kadipani. In our view, the company is concentrating on this project. This would
diversify the revenue stream of GMDC.

GMDC has also floated an application for an Environmental expert on contract basis
for a period of two years. The incumbent will help the company expedite the
environmental clearances and permissions. Also, the expert will help the company
in identifying environmental risks proactively and devise the mitigation plan.

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 GMDC

Area 5: Rare earths might unleash value

In a reply to a question in the Lok Sabha on 2 February, 2022, the government said
that as on Jan-22 end, rare earth oxide reserves in Ambadongar area of Chota
Udepur district in Gujarat is pegged at 737,283 tonnes. This is more than the twice
of the initial estimate of 346kt, mentioned by the Atomic Minerals Directorate in a
report dated Nov-20.

In the same reply, the government has mentioned about greater self-reliance in rare
earth production and is targeting increasing rare earth oxide mining capability by 3x
by CY32.

The biggest advantage here is that rare earth deposits are contiguous to fluorspar
deposits that GMDC is currently mining. Hence, we believe that GMDC will have a
major role to play in any such government’s endeavour.

In our view, the foray into rare earths is still in nascent stage. However, the
management expressed confidence that GMDC will be able to do end to end work
in the rare earths business. The chairman expressed confidence that the initial
indications are positive and concentration of rare earths in the contiguous areas is
higher than the global average of 2%.

In our view, it would be interesting to see how the company proceeds with
development, exploitation and commercialisation of rare earths deposits. The
company would need to augment its manpower and equipment fleet adequately.
Furthermore, there might be radioactive elements as well whose disposal and
handling requires specialisation and advanced waste management techniques.
Above all, these minerals are of national importance, hence we need to keep a close
tab on the role GMDC is likely to play.

Hence, currently we do not give any value to the rare earths business and have not
considered it in our fair value calculation.

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 GMDC

We value GMDC at INR245/share

GMDC is trading at par with mid-cycle multiple
Post the impressive run-up over last few months, the stock is trading at 5.2x FY22E
EBITDA – slightly lower than its ten year historical average. Despite the current level
of seemingly higher profitability, we expect the stock to trade at a higher level than
the past owing to narrowing discount between lignite and substitutes, resulting in
higher level of profit and focus on other revenue streams (adjacent) that could lend
additional earnings in the medium-term.

EV/EBITDA across the cycles

10.0

8.0

6.0
(x)

4.0

2.0

-
Nov-13

Mar-17
Feb-11
Sep-11

Oct-12

Dec-14

Feb-16

Sep-17

Oct-18

Dec-19

Feb-22
Jan-21
May-13

Jun-14

Aug-16

May-19

Jun-20
Apr-12

Apr-18
Jul-15

Jul-21
EV/EBITDA (1 year forward) Average
Mean - 1 std dev Mean + 1 std dev
Source: Edelweiss Research, Bloomberg

On P/E as well, GMDC is trading near its long-term average of 6.3x. Similar to
EV/EBITDA, we expect the stock to trade at mean multiple, as the profitability of the
company has moved up sustainably.

P/E across the cycles

12.5

10.0

7.5
(x)

5.0

2.5

-
May-19
Mar-17
Feb-11
Sep-11

Oct-12
May-13
Nov-13
Jun-14
Dec-14

Feb-16
Aug-16

Sep-17

Oct-18

Dec-19
Jun-20

Feb-22
Jan-21
Apr-12

Jul-15

Apr-18

Jul-21

P/E ratio (1 year forward) Average

Source: Edelweiss Research, Bloomberg

On P/BV, GMDC is trading below its historical average. Globally, the multiples of coal
companies have de-rated on ESG concerns. However, we expect P/BV to be re-rated
once the contribution of lignite in overall earnings comes down.

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 GMDC

P/BV across the cycles

4.0

3.2

2.4

(x)
1.6

0.8

Jun-11

Mar-17

Mar-21
Nov-10

Feb-13
Sep-13

Nov-14
Jun-15

Sep-17

Nov-18
Jun-19
Dec-11

Jan-16

Jan-20

Oct-21
Aug-16

Aug-20
Apr-10

Jul-12

Apr-14

Apr-18
P/BV (1 year forward) Average

Source: Edelweiss Research, Bloomberg

Trading at par with peers

As most lignite mining companies are unlisted and/or not widely covered, direct
peer comparison is not possible. Moreover, as lignite is a relatively localized
commodity, it cannot be transported over long distances unlike coal. Hence, a
comparison with thermal coal players is also not effective.

Nevertheless, lignite mined by GMDC competes with coal as a fuel, and hence, we
are using global/domestic coal peers for comparison. As the table below shows,
GMDC is trading higher on FY22E earnings and slightly lower on FY23E earnings
compared to global peers on P/E, EV/EBITDA and P/CF. Despite the smaller size of
the company and very localized nature of business, we believe that GMDC should
trade at premium to coal peers given the focus to diversify earnings. Hence, we
adopt 5x EBITDA for valuing the stock.

GMDC compared to the global companies

Market Cap Ent. Value EV/EBITDA (x) P/E (x) P/B (x)
Company
(USD mn) (USD mn) FY22E FY23E FY22E FY23E FY22E FY23E
GMDC 617 606 5.2 2.6 9.4 5.5 1.2 0.8
Coal India 13,411 10,110 3.8 4.1 7.0 8.0 2.5 2.5
Peabody Energy Corp 2,193 2,462 1.7 2.9 3.0 8.5 NM NM
Adaro Energy Tbk 5,067 5,366 3.4 3.6 7.5 7.5 1.2 1.1
Bukit Asam TBK 2,350 2,074 3.2 3.3 5.1 6.1 1.5 1.4
Median 3.4 3.6 7.0 7.5 1.2 1.1
Average 3.1 3.3 5.6 7.0 1.4 1.2
Source: Edelweiss Research, Bloomberg

With new mines expected to launch towards the end of FY23E, we expect GMDC to
accrue EBITDA with a CAGR of 58% through to FY24E (compared to FY20) and net
cash of INR19bn by FY22E.

We estimate significant EPS CAGR through to FY24E and potential upside from
strategic projects. Thus, we ascribe GMDC a multiple of 5.0x FY23E EBITDA, yielding
a TP of INR245. We upgrade the stock to ‘BUY’ from ‘HOLD’.

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 GMDC

We value GMDC at INR245/share

FY23E
Applicable EBITDA (INR mn) 11,965
Applied multiple (x) 5.0
EV (INR mn) 59,827
Net Debt/(Cash) (INR mn) -17,955
Implied Market cap (INR mn) 77,782
Implied share price (INR/sh) 245
Source: Company, Edelweiss Research

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 GMDC

Company Description
Gujarat Mineral Development Corporation (GMDC) operates through two primary
segments: Mining and Power. GMDC's projects include Lignite, Bauxite, Fluorspar,
Manganese and Power, however, lignite mining is the chief operation. It operates
over six lignite mines, namely, Panandhro, Mata-No-Madh, Rajpardi, Tadkeshwar,
Bhavnagar and Umarsar, of which Panandhro is exhausted, however, it has reserves
of more than ~250mt. GMDC operates both thermal and renewable power plants.
The thermal power capacity of GMDC is 250MW at Akrimota Thermal Power Station.
GMDC operates wind and solar power in Gujarat with capacity of 200.5MW and
5MW capacity respectively. GMDC also has bauxite mining operations at its Mewasa
Bauxite Mines in Devbhoomi Dwarka. GMDC also has several secondary minerals it
obtains as a part of its overburden in lignite, which GMDC plans to utilize by
undertaking merchant sales of mined minerals.

Investment Theme
We are surprised by the series of price hikes taken by the management since Aug-
21, taking advantage of the higher price of substitutes. Furthermore, the volume
ramp up is also evident. Besides, the company has appointed consultants to look at
opportunities beyond lignite. Owing to the ongoing Russia-Ukraine tensions, we
expect global coal prices to remain robust in the medium term. Besides, the
management has indicated that the discount with respect to substitutes is expected
to be narrower going ahead. We believe that the other streams of revenue are also
promising and a clearer path will be revealed in due course.

Key Risks
 Change in leadership team

 International coal prices declining rapidly

 Delay in mine ramp up or faster operationalisation of new mines could impact

profitability

 Lignite’s high ash and sulphur content begets environmental concerns

 Rare Earth opportunity does not come up

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 GMDC

Additional Data
Management Holdings – Top 10*
Chairman Dr. Rajiv Kumar Gupta, IAS % Holding % Holding

MD Roopwant Singh, IAS LIC of India 1.63

Dimensional Fun 0.37
CFO Lavanya Kulshrestha
American Centur 0.01
GM (Lignite), Marketing & A.K. Makadia
Sales (except Lignite) & CSR ICICI Prudentia 0.00
Auditor S.C. Ajmera & Co
*Latest public data

Recent Company Research Recent Sector Research

Date Title Price Reco Date Name of Co./Sector Title
Robust performance sustains;
28-Jan-22 Revival of fortunes; Result Update 111 Hold 02-Mar-22 Coal India
Company Update
Still not out of the woods; Result Non-ferrous: Steady show; Sector
01-Nov-21 73 Hold 25-Feb-22 Metals & Mining
Update Update
Right intent; execution key; Supply shortage and disruption in
27-Aug-21 71 Hold 25-Feb-22 Metals & Mining
Company Update focus ; Sector Update

Rating Interpretation Daily Volume

40
175

TP 32
145
125
TP
(INR)

115 105 24
TP
(Mn)

80
85 TP
TP 16
56
48
55
8
25
Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21
0
GMDC IN Equity Buy Hold Reduce Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 192 55 17 266 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 233 43 8 284 Reduce: <-5%

*2 stocks under review

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 GMDC

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