GMDC: What Next for this 12-Bagger Stock? 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

If someone had told me back in March 2020 that the Indian stock market could give rise to multiple 10-bagger stocks over the next 3-5 years, I would have had a hard time believing it.

Even more hard to believe would have been the prediction that Gujarat Mineral Development Corporation or GMDC as it is popularly known as, would be one of the 10-baggers.

Yes, that's right. GMDC has had a stellar run since its March 2020 lows and is up a whopping 12x since then. So, it has gone one step ahead and has ended up being an impressive 12-bagger.

To be honest, the movement in the stock price has caught most investors by surprise.

It has certainly caught me by surprise. Especially the surge in the last 12 months. In fact, it has tripled in the last six months alone.

And the way it is going up, it doesn't look like it is in any hurry to take a breather.

GMDC is one of the public sector enterprises of the Government of Gujarat, primarily engaged in mining and marketing of industrial minerals in the state.

It has more than six decades of experience in the mining & minerals sector. It is India's largest merchant seller of lignite and the second-largest lignite-producing company in India.

The major source of its revenue is the lignite mining which contributes 85-90% of its total income. GMDC caters to around 25% of Gujarat's total demand for lignite, which the company plans to take to 30-35% by FY25.

GMDC has diversified customer base comprising small and medium-sized companies spread across textiles, steel, cement, power generation and various other sectors.

The top ten customers of GMDC contributed around 16% and 13% of TOI during FY22 and 9MFY23 respectively, indicating diversified customer base which is likely to remain at similar level in future.

Talking of financial performance, here's the snapshot of its P&L statement for the last 10 years.

As you can see, the company's net profits, the last row in the table, has been all over the place over the last 10 years.

In fact, if you leave aside March 2023, the profits have averaged between Rs 200 crores to Rs 600 crores.

The operating profit margin has also varied a lot all these years. The financials of the company tell me that the stock has struggled to growth both its topline as well as bottomline over the last decade.

They also tell me that the pricing power seems to be missing as operating margins have been all over the place. All in all, this looks like a commodity company where the topline as well as the bottomline is at the mercy of commodity prices, which in this case is lignite.

The good thing is that GMDC has a rock-solid balance sheet where the debt has been almost zero over the years. Besides, it has also been a good dividend paymaster, paying out nearly one-third of its profits as dividends on a consistent basis.

You see, when it comes to commodity companies, I have a simple thumb rule. First, I usually value them based on price to book value because their earnings are volatile and second, I prefer a short holding period of 1-2 years in most of these companies.

When it comes to GMDC, its median price to book value over the long term has been close to 1x. Therefore, if one were to invest in GMDC, one should consider buying it a price to book value of 0.5x and sell it a price to book of 1x.

Over the last two years, there have been two such opportunities where investor would have earned good returns by following this strategy.

The first one came in February 2016 when the stock price fell to price to book value of 0.5x. The stock doubled within the next one year itself, earning 109.3% for the investor who would have invested back then.

The next opportunity of buying close to 0.5x price to book value came in April 2019, when the stock once again slipped below 0.5x. This time though it took almost 3 years for the stock to go back to a price to book value of 1x. However, the CAGR returns of 24% was still quite good in my view.

So, as I said there have bene only two opportunities in the last few years to buy the stock at a price to book value of 0.5x and sell at 1x.

Is the stock providing any such opportunity right now? Is the stock currently available at price to book value multiple of 0.5x? Well, it is nowhere close to this valuation.

In fact, at the current price, the stock is available at one of its most expensive price to book ratios. At the current price of Rs 360 or thereabouts, the stock is twice as expensive as its book value of Rs 180 per share.

In other words, the price to book value ratio of GMDC currently stands at a huge 2x.

This is double its long-term average of 1x and 4-times higher than the limit set by me of 0.5x.

In fact, this is only the second time in the last 10 years that the stock has gone beyond the price to book value multiple of 2x.

The last time this happened was back in June 2014 when price to book value multiple reached a high of 2.1x.

However, this story did not have a happy ending for investors who would have bought at a price to book value of 2.1x back in June 2014. The stock crashed by more than 60% in the following years before staging a recovery. Let me repeat that. The stock crashed more than 60% for those who would have invested at price to book value of more than 2x back in June 2014. In fact, it took more than 3 years for these investors to break even on their investment.

Therefore, here's the million-dollar question. The stock is trading at a price to book value multiple of more than 2x currently as well. Does this mean that the investors investing at the current price point will meet the same fate as their predecessors back in June 2014? Will the stock see another 60% crash?

Well, things are different now to be honest. The company's profits were in the Rs 400 to Rs 500 crores range back in June 2014. Right now, they are in the region of Rs 1,000 to Rs 1,200 crores. So, profits are higher by almost 2.5x to 3x right now. However, are the current high profits sustainable? To be honest, the company recorded bumper profits in FY23 because of the huge increase in lignite prices. As per reports, lignite prices jumped by more than 40% during FY23 and this helped GMDC achieve record profits.

But this was a one-off event, and we can't expect prices to keep rising at this rate going forward. Therefore, caution needs to be exercise to that extent. In fact, during June quarter, the company's topline fell by more than 30% on the back of fall in lignite prices.

However, there is good news on the volume front. GMDC is confident of compensating for the moderation in profits by increasing its volumes. It is expected that volumes will grow by 15%-20% in the current fiscal, thus offsetting some of the impact of fall in prices.

Also, the company is expected to add 6 new mines, leaving it with a total of 9 mines in the next 4-5 years, thus providing good revenue visibility. During March 2023, the company got allocation of two coal blocks at Odisha which it plans to develop over a period of four years in a phased manner.

Then there's good news on the non-lignite part of the business as well. The company aims to increase the share of revenue from non-lignite segment to around 50% in the medium term which currently contributes less than 15%.

So there is definitely a new found aggression in GMDC and the future does seem a lot better than what it has managed to achieve in the past.

Needless to say, all these growth plans will require investments and hence, there will be a corresponding expansion in the net worth or the book value of the company.

In fact, as per the company's own estimates, the book value of company is expected to increase by 4-times by 2027-28. Put differently, from Rs 180 per share currently, the book value can quadruple to more than Rs 700 per share if everything pans out as expected for the company.

Well, the math of what the stock price of the company will look like by FY28 is not that hard. Turns out, the risk-reward of investing in the stock even after the huge run up in price doesn't look all that bad. This is of course assuming everything goes as per plan.

So, should one buy the stock at the current levels? You see, as I said, I like to buy commodity stocks as value stocks and exit after making a quick 50%-100%.

GMDC is no longer a value stock. In fact, it has become a growth stock based on its bright future prospects.

So, this one is definitely outside my circle of competence and I will give it a pass.

But if I was someone who bought the stock at distressed valuation few months back then I am certainly not selling it in a hurry.

I will wait to see how the story unfolds before taking a SELL call.

I hope I was able to add value to the discussion around the stock. This brings me to the end of this video. I will see you again next time. Good bye and happy investing.