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    Lower VAT on lignite in GST regime to boost GMDC’s profitability

    Synopsis

    GMDC incurs 37% tax on lignite, including VAT and excise duty. According to analysts, in case of 18% GST rate, levies will be reduced by `250 per tonne.

    ET Bureau
    ET INTELLIGENCE GROUP: State-owned lignite miner Gujarat Mineral Development Corporation (GMDC) will be a direct beneficiary of the Goods and Services Tax (GST) which is expected to be implemented from July.

    Currently, VAT on lignite in Gujarat is 22.5%, much higher than the 5-5.5% in other lignite producing states such as Rajasthan and Tamil Nadu. As the tax rates converge, GMDC will have enough room to compete with other lignite producers, thus boosting its profitability .

    At present, GMDC incurs 37% tax on lignite, including VAT and excise duty. According to analysts' estimates, in case of 18% GST rate, levies will be reduced by `250 per tonne, which is around 45% of the profit per tonne that the miner makes. The actual benefit on the total earnings would be clear once the exact tax structure on lignite is declared. The lignite business accounts for over two-thirds of the company's total revenues and also supports the pithead power plant. The remaining revenue comes from power, bauxite and manganese.

    Another trigger for the company would be the benefit from the higher prices of international coal. Due to poor infrastructure, Coal India's coal is not accessible to the power plants to which GMDC supplies lignite.International coal prices (Australian Newcastle port prices), although down from their recent highs, are up 50% in the last one year. A partial benefit of this showed in the December quarter, as the company's sales grew 40% year-on-year driven by better pricing and higher volumes.Absence of volumes from its large mine, Panandhro, was offset by production from the other five mines, all in Gujarat. Its volumes were up 7% yearon-year. However, net profit remained flat as the initial cost of production at the new mines remains high.

    Full benefit of higher international coal prices and tax would be seen in the coming quarters. There is a lag effect between the prices going up and passing it on to the customers and several mediumto long-term contracts with the power plants get renewed in the year end.

    On the valuation front, GMDC is one of the cheapest mining companies with an enterprise value (EV) at 3.5 times estimated FY19 operating profit before depreciation (EBIDTA) -a ratio used to value mining companies. In addition, close to 40% of the company's market capitalisation is cash. At the current market price of `113.9, the dividend yield per share stands at 3.2%.



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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