Fuelling change from within

ON NOVEMBER 19, 2015, a Twitter follower of Vijay Kedia, one of the most influential traders in the Indian stock market, requested a stock tip. Kedia tweeted back: “GMDC [Gujarat Mineral Development Corporation] looks cheap to me but do your homework. I have vested interests in it.” Investors were baffled. Why was Kedia buying and recommending shares of a company battered by the commodities downturn?

GMDC might have lost 38% of its value year-on-year, but Kedia saw an opportunity amid the gloom. With a price to earnings ratio of 5.97 and a dividend yield of 3.51%, GMDC was definitely selling cheap. Also, the state-run Ahmedabad-based company had just announced the government was lifting a bar on selling its biggest product, lignite (low grade coal), only to end users. This alone, GMDC hoped, would increase revenues by 25%.

Cut to 2017. GMDC’s revenues have increased around 30% year-on-year from Rs 1,344.8 crore to Rs 1,761 crore (FY17 figures are from unaudited results). Profit after tax matched the pace, rising more than 30% from Rs 241.1 crore to Rs 324 crore during this period.

It’s a long way for GMDC, which started in 1963 with just sand quarrying operations. The company’s big break came in 1974, when it obtained a licence to mine lignite in the Kutch region. Today, it owns six lignite mines in Gujarat. The next turning point was its decision to enter power generation in 1996 by setting up thermal power plants that used the lignite it mined. The move was as much about going up the value chain as it was about de-risking the lignite business. “Each time the global price of coal falls, our margins are hit because customers choose the cheaper option,” says A.L. Thakor, chief general manager of GMDC.

The strategy paid off. GMDC’s business has been on the upswing with revenue climbing from Rs 1,483 crore in FY14 to Rs 1,761 crore in FY17. As a result, GMDC makes it to the Fortune India Next 500 the third year in a row, even though it has fallen sharply to 122 from a high No. 6 last year. But this fall is a result of several new companies entering the pool and revenues of others going up.

The company’s stock has climbed to around Rs 155 after falling to around Rs 70 two years ago. So, what has GMDC been doing right? Well, it was in the right place at the right time, for starters. It had a monopoly in lignite mining, but used that business to enter the power sector at a time when demand for power was increasing because Gujarat was going through a phase of rapid industrialisation. Its first thermal power plant with a capacity of 250 MW started in Kutch in 2005 and another 500 MW plant is expected to start operations in Bhavnagar soon. The output is sold to the Gujarat electricity board and private buyers in the state.

GMDC didn’t stop at generating power from lignite. It decided to harness wind energy in 2009 when it commissioned wind turbine clusters with a capacity of around 200 MW. Today, power accounts for a large chunk of its total revenue. Its revenues from the power business increased from Rs 285 crore in FY14 to Rs 455 crore in the last fiscal and accounted for around a fourth of total revenues.

The company expects to raise this share by another 5% over the next five years as it harnesses wind energy in a big way. “Our vision is to keep increasing wind energy generation by around 50 MW each year,” says Thakor. The company has set aside Rs 300 crore this year to achieve this target. It also plans to move into solar power, with a capacity of 5 MW to start with.

ANALYSTS, WHO WERE once unsure about GMDC’s power play, are now more positive. In May, Moneycontrol’s research analyst Jitendra Kumar Gupta wrote: “Investors can expect the large capital stuck in the power business to start contributing to profitability, thus generating higher cash flows and better returns ratios.”

To be sure, GMDC’s share in power generation in Gujarat is minuscule. Gujarat State Electricity Corporation alone accounts for around 30% of power generation in the state. Then there are private players such as Adani Power and Torrent Power. Besides, as a public sector company, GMDC also has special responsibilities. “As a state-run body we have to supply to all customers, not just the highest bidder,” says managing director Arunkumar Solanki. His priority now is to maximise capacity utilisation. “That is the only way we can use economies of scale and continue to provide for even the smallest customer.”

The new GST regime, which has slashed taxes on lignite from 37% to 5% is a shot in GMDC’s arm, even as India tries to push domestic production and cut expensive fuel imports. “We have a lot of growth potential to explore,” says Thakor.

So do the punters on Dalal Street.