Buy NMDC - 3QFY13 Results Update - Motilal Oswal

- Adjusted PAT declined 23% QoQ to INR13b (v/s est of INR13.6b) due to 17% lower volumes and 12% lower realization.

- Net sales declined 22% QoQ to INR20.5b. Iron ore volumes declined 17% QoQ to 5.3m tons due to volatility in prices, lower offtake by customers and evacuation bottlenecks due to prolonged monsoon. Since NMDC's prices of iron ore lumps were not agile enough with the changing spot market, domestic lumps sales volumes declined 26% QoQ. Whereas, volumes of iron ore fines declined only 4% QoQ.

- Average realization declined 13.7% QoQ to INR3,834/ton (USD71/ton) despite an average price correction of only ~10%. Adverse mix of lumps affected the average iron ore realization. Share of lumps in the mix was only 26% in 3QFY13 v/s 32% in 2QFY13 and 36% in FY12.

- EBITDA declined 28% QoQ to INR13.9b. EBITDA per ton was USD48 (-19% QoQ).

- Other income at INR5.6b fell 8% short of our estimates. Total cash and equivalents now stand at INR220b v/s INR202b as on March 31, 2012.

- We expect average iron ore realization to inch up in subsequent quarters due to recovery in dispatches of iron ore lumps. Total volumes too are expected to move up sharply to 6.5m tons (or better) in 4QFY13 due to (1) easing of bottlenecks in transportation of iron ore from Bailadila region on commissioning of uniflow loading system and (2) rationalization of lumps prices in January.

- Stock has been underperforming, despite strong fundamentals, as concern over capital allocation heightened after the recent amendment in PSE guidelines which allow PSEs to utilize cash to buy stocks of other PSEs. This remains a risk as management will be unable to block any such investor unfavorable government directive.

- Stock is trading at compelling FY15E EV/EBITDA of 3x. Dividend yield is attractive at 5.1%.

Source : Equity Bulls

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