Volume growth to remain robust, GST strong trigger for pricing, maintain LONG
GMDC posted strong numbers during 4Q with 116% yoy EBITDA growth, which came 21% ahead of EE, driven by 31% yoy growth in lignite sales volume and corresponding benefit of operating leverage. Mine closure expenses declined 47% yoy as company has already completed full provisioning for Mata-no-Madh and Panandhro mines for the full mine life, so in FY18, it will decline yoy. Company continues to see good traction in volumes due to higher imported coal prices and yoy volume growth in even April month was strong 34%. We are increasing our FY18E volumes by 3% and now assume 12% yoy lignite volume growth in FY18E. GST remains key trigger for pricing as highlighted in our Mar’17 note. We maintain LONG with revised Jun’18 DCF based PT of Rs 150 (earlier Mar’18 PT of Rs 137).
GST key trigger for price increase as Gujarat has 22.5% VAT on lignite vs. 5% VAT in other states:
Lignite has VAT of 22.5% in Gujarat, which is significantly higher than 5% duty on lignite or coal in other States. Most of the States charge VAT @5% & Excise duty is at 6%, so GST rate is likely to be low around 12% as government would not like to increase cost of power. GST rate @12%/18% will reduce landed cost of lignite to customers by Rs. 290/185, and give GMDC room to increase prices. We are not factoring the same in our pricing but that poses an upside to our estimates.
Profitability to remain strong due to benefits of operating leverage in FY18E:
We believe that lignite EBITDA per ton with improve further in FY18E to ~Rs. 246 from ~Rs. 229 driven by 1) higher volumes will lead to better operating leverage, 2) mine closure expenses will decline yoy as company has already provided full for Panandhro and Mata no Madh mines, and 3) Panandhro will remain operational in 1HFY18, where overburden removal charges are low as mine is towards the end of its life. We have increased blended ASPs to reflect change in supplies to power plants from Panandhro to Mata-no-Madh, which has high cost lignite.
EBITDA grew 116% yoy, 21% above EE due to high lignite profitability, other income lower due to lower yield on deposits:
EBITDA/ton on lignite was strong Rs 364 vs. Rs 226 last year and Rs. 162 in 3QFY17 as per our estimates. Improvement was mainly driven by higher volumes. Other income declined 21% yoy & 37% qoq as yield on cash has come down and also cash balance was lower due to capex of ~Rs. 5bn during the year towards wind (Rs 3bn) and land acquisition. Account receivables increased due to dues from BECL, but that’s expected to normalize going ahead.
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