NMDC - Quality business at attractive valuations - Religare

We initiate coverage on NMDC with a BUY rating and TP of Rs 185. We like the business model given NMDC's access to high quality iron ore reserves, its low cost of production, a tightening domestic demand-supply situation and potential for a steady pricing uptick given the discount to global prices. NMDC also generates high FCF and net cash on books is ~30% of market cap. We believe current valuations at 4.2x FY14E EV/EBITDA are attractive given the volume/pricing growth potential and defensive earnings profile.

- Iron ore demand-supply dynamics favourable: While domestic iron ore production is expected to drop to 150mt in FY13, iron ore consumption is expected to continue to grow at an 8-9% CAGR over FY12-15E, resulting in a tight demand-supply situation in the near future. NMDC will clearly be the biggest beneficiary as it continues to operate its mines and exercise greater pricing power.

- Production capacity to increase 50% by FY15: Though the company has fallen short of expansion targets in the past due to regulatory issues and operations in Naxal-affected areas, we expect the planned 50% production ramp-up to proceed as scheduled by FY15 given the tightening domestic iron ore situation.

- Pricing not at risk given discount to global prices: NMDC's realisations are still lower than global prices - even on export parity basis. Thus, there is comfortable support for its domestic and export realisations in case of further weakness in global prices.

- Strong balance sheet to fund future expansion: NMDC has a strong balance sheet with net cash of Rs 220bn and FCF generation of ~Rs 150 bn in FY13-14. Thus it will be able to finance future expansion via internal cash flows.

- Initiate with BUY: We initiate coverage with a BUY rating and TP of Rs 185 based on 5x FY14E EV/EBITDA. Below-expected volume growth is a key risk to our call.

Source : Equity Bulls

Keywords