NMDC - Volume disappointment mars performance - Centrum

NMDC's operational performance was well below expectations with EBITDA at Rs19.3bn (margin of 74.1%) as sales volume dropped by ~15% QoQ to ~5.9MT. Volumes suffered due to heavy monsoons and exports unexpectedly rose to 3.75 lakh tonne resulting in increased expenses on freight and margin compression. NMDC had hiked iron ore prices for the quarter and blended realizations stood at ~Rs4465/tonne (up by 7.8% QoQ) but pricing has started to taper down from October onwards to reflect global iron ore price fall. NMDC recently guided for flat volumes for FY13E as evacuation bottlenecks continued to adversely affect operations and has announced price cuts of ~12% in both fines and lumps in Q3FY12E through monthly cuts announced for Oct and Nov. We reduce our volumes and PAT estimates by 8-10% for FY13E/14E to account for the same. Maintain buy with a reduced target price of Rs205.

Volumes drop sharply; export volumes increase unexpectedly: Sales volumes stood at ~5.9MT, down by ~23% YoY and ~15% QoQ as production and evacuation from Chhattisgarh mines was adversely affected by heavy monsoons. Exports increased unexpectedly to 3.75 lakh tonne amidst global iron ore price fall that led to higher freight costs. Realizations remained strong at ~Rs4465/tonne as NMDC announced price hikes during the quarter. The prices have since been reduced in October and November by ~12% for both fines and lumps after shift to monthly pricing.

EBITDA margin falls sharply as export volumes increase expenses: EBITDA margin went down sharply during the quarter to 74.1% (down by 690bps QoQ) and EBITDA stood at ~Rs19.3bn (EBITDA/tonne of ~Rs3300, down by ~1.5% QoQ). Margin drop was mainly on account of lower overall volumes and exports accounting for 6.4% of overall volumes in the sales mix.

Outlook - Pricing coming under pressure; faltering volume growth remains a dampener: Iron ore pricing for NMDC has come under pressure recently despite favourable domestic demand supply situation on account of a fall in global prices and pressure from the steel ministry. The pricing mechanism has been shifted to monthly pricing. October prices were reduced by 2% for lumps and 11% for fines and November prices have been reduced by 10% for lumps and 2% for fines. On the volume front, the company has disappointed and guided for flat volume growth for FY13E. The company's capex on mining expansions and the setting up of steel and pellet plants in Karnataka continue albeit at a slow pace. We cut our FY13E/FY14E volume estimates by 8.3%/8.8% to 27.5/31 MT and build in export share of 3%/4% in overall volumes. We marginally change our blended realization estimates for FY13E/14E as we have been already factoring in the drop in H2FY13E. We cut our EBITDA estimates by 12%/11.7% for FY13E/14E on account of lower volumes and higher expenses on export sales.

Maintain Buy with a reduced target price: We reduce our estimates and target price on the stock but remain structurally positive on the company as we see volume growth ahead (in H2FY13E & FY14E) with higher e-auction sales volume from Karnataka, better evacuation from Chhattisgarh and expansion at Bailadila 11 B and Kumaraswamy mines. We continue to value the company at 6.5x FY14E EV/EBITDA to arrive at a target price of Rs205. Maintain Buy.

Source : Equity Bulls

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