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I wish to learn more about “Gujarat NRE Coke Ltd” & your views on this stock : Sujay Kamath, New Delhi

It is one of the Indian company to have acquired captive coking coal mines outside India. GNCL has already started the mining in Australian mines and is expected to produce more than 1 million MT of coking coal for FY10 and slowly scale up to over 7 million MT by 2013E. The domestic demand for coke has to be fulfilled through imports from Australia, Canada, USA, or China as India does not have reserves to that extent. And, taking into consideration various other issues, Australia seems to be the most suitable location to import coking coal.

The stock price has fallen due to concerns regarding the falling coking coal and coke prices, all the negatives have been to be discounted in the stock price and the stock looks very attractive at current levels. A better than expected rise in coking coal and coke prices may lead the stock to even higher levels.

The company’s captive coking coal mines and captive power plant will help it in sustaining the slowdown in the economy. We have projected coke sales volume of 1.09 mtpa and 1.58 mtpa for FY10 and FY11 respectively. Coke realizations are likely to decrease by 34% in FY10 as compared to FY09 as the coke consumers, mainly the steel producers would enter into new contracts for FY10 at a much lower rate than FY09 due to the fall in coke prices in international spot markets.



However, we expect the demand for coke to start picking up in Q4FY10 and the realizations to improve by at least 10% in FY11. The expected coking coal sales volume is 2.54 mtpa and 3.07 mtpa for FY10 and FY11 respectively. Coking coal and coke prices are likely to move in tandem. The company’s Australian coking coal business has better margins than the Indian coke manufacturing business, and, hence the company has plans to shift its focus from coke manufacturing to directly selling coking coal.



The projected net sales of the company on a consolidated basis for FY10 and FY11 is Rs 28451 Mn and Rs 37468 Mn respectively, the EBITDA is Rs 7941 Mn and Rs 11626 Mn respectively, and the net profit is Rs 4885 Mn and Rs 7310 Mn respectively.



Financial Snapshot

  • Net sales for FY09 on a consolidated basis has increase by more than 200%. Higher coke and coking coal realizations during the first three quarters of FY09 and the start of sale of coking coal from the Australian mines has led to a high growth in sales in FY09.
  • Coking coal and coke prices have fallen since Oct 08 and are likely to remain under pressure for the next two quarters. This will affect the sales but much of it will be compensated by the sale of additional coking coal by Australian mines. So, the net sales for FY10 is likely to remain flat.
  • Additional coke capacity being planned by the company, an increase in the coking coal sales volume by the Australian mines, and an improvement in realizations from Q4FY10 will help the sales grow by 30% in FY11.
  • EBITDA and net profit margins are higher in FY09 as compared to FY08 due to a higher realization. EBITDA margin is likely to increase by 960 bps YOY and the net profit margin by 100 bps YOY in FY09. Margins will remain flat in FY10 and FY11 due to stable coking coal and coke prices, also, the company will start sourcing 90% of its coking coal requirement for Indian operations from its Australian subsidiaries…

Final Verdict: You can Buy more and Hold on to the stock for next 3 Years.



- B M Chandrasekhar, Lead Analyst HCMC

Note: The stocks discussed at www.hbjcapital.wpengine.com thru blog postings are neither a part of “10in3” not “Street Smart” issues which we publish for paid subscribers. These are just stock specific views by HBJ Capital team; one MUST do the due diligence before doing any investment based on our reco.

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