FPO note on NMDC - Angel Broking

Incorporated in November 1958, government-owned NMDC is India's largest iron ore producer with a capacity of 32mn tonne. The company operates high-grade iron ore mines in Chhattisgarh and Karnataka. As of March 31, 2011, its estimated reserves and resources stood at 1,434m tonnes.

Iron ore capacity to expand: NMDC aims to ramp up its production capacity to 48mn tonne by FY2015E (current capacity - 32mn tonne) through increased exploration of its existing mines and development of new mines, ie, Bailadila 11/B, Kurumaswamy and Deposit 10 & 11/A. However, given its past track record, we forecast iron ore production capacity to increase to 40mn tonne by FY2015 (compared to its target of 48mn tonne).

Low cost producer of iron ore: NMDC is one of the lowest cost producers of iron ore on account of its highly mechanized mines, high-grade iron ore mines and logistical efficiencies. Further, NMDC (unlike other PSUs such as SAIL and Coal India) does not face issues of overstaffing.

Seeking to diversify into steel making: NMDC intends to diversify its operations by moving downstream through establishing steel plants and pellet plants. Accordingly, the company aims to build an integrated 3mn tonne steel plant in Jagdalpur, Chhattisgarh with a capex of Rs.15,525cr.

Outlook and valuation: Over the past five years, NMDC has traded at an average EV/EBITDA of 11.1x, compared to its upper band price valuation of 3.6x FY2014E EV/EBITDA. A strong balance sheet, presence in sellers market (iron ore), low cost of production, high-grade mines and long mine life make NMDC an attractive bet in our view. Valuing the stock at 5.5x FY2014E EV/EBITDA, we derive a fair price of Rs.198 and recommend investors to Subscribe to the issue at the upper price band of Rs.150.

Source : Equity Bulls

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