We maintain ?outperform? on Gujarat Mineral Development (GMDC) as volume visibility has improved. We raise our FY14 volume assumption and our target price to R235 (R210 earlier) based on DCF valuation with 8% risk free rate, 1.1 beta, 6.5% risk premium and 10% target-debt ratio. Discount rate is 14.2%, and we do not use any terminal value growth.
We raise our FY14 EPS by 10% to R29 and introduce FY15 EPS of R33 primarily due to better volume visibility. Management guides to better visibility on environmental clearance (EC) for its expansions at Mata-no-Madh (3.6 to 4.8 million tonne; EC in 2-3 months), Bhavnagar (3-5 million tonne) and new mines in Umarsar (1 million tonne; EC in a month). This raises our FY14 volume estimates by 5% to 15 million tonne (up 18% y-o-y; company guides to over 20% y-o-y). We build in another 5% increase in FY15. We believe volumes from wind energy business is likely to get better. GMDC has ramped up its wind energy business better than expected.
Construction is underway on an additional 50 megawatt (MW) wind energy plant expected by FY14 beginning, taking total wind capacity to 150 MW.
Our estimates of FY14 power sales are therefore bumped up by 30%, contributing 4% additional sales to the total, given better-than-expected expansion in the wind power business, and slightly improved plant load factor (PLF) at the Akrimota 250 MW TPS. We believe concerns over PLF are likely to ease in the future. Low PLF at the Akrimota TPS has been a cause of concern. Due to trouble with the boiler, PLF has remained below 50% since FY12. Though the firm has been able to bring up PLF to 53% in Q3FY13, they realise that better expertise is demanded for the plant?s operations. They have, therefore, outsourced operations to KEPCO ? the handover should start by February 2013, and end by August 2013. KEPCO, a Korean utility, will bring down costs by R400 million and also increase PLF quite dramatically. KEPCO?s incentives will start only above 75% PLF.
Board approval for the R100 per tonne increase in prices of merchant lignite volumes (announced in Q2) is now imminent.
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