Initiating Coverage on NMDC - Networth Capital

NMDC is the largest iron ore miner in India with a total reserve of 1.3 bn tones rich iron ore(+65% Fe content) has its major mining complexes at Chhattisgarh & Karnataka with a total mining capacity of 32 MMT per annum.

Largest Iron Ore miner in India

NMDC is the largest iron ore miner in India with reserve of 1.3 bn tonnes of rich iron ore (+65% Fe content) and planning to expand its capacity from the current 32 MTPA to 48 MTPA till FY15. However considering the high demand supply gap for iron ore in domestic market, we expect sales volume CAGR to be 5.5% during FY13 to FY15 (with development of Bailadila Deposit 11B & Kumarswamy at Karnataka) compared to (1.5)% CAGR during FY09 to FY12. Expansion in volume with almost stable realisation, we expect top line would grow by 7% CAGR during the same period.

Low cost iron ore producer with high margin

Highly mechanized and open cast mines of NMDC helps the company in lower cost of production. NMDc's average cost of production of ~ USD 17/ton (Including Royalty) is quite lower compared to other domestic player(~ USD 36/ton) and international average cost of USD 45 / ton. NMDC's blended realization for iron ore is at Rs 4091/ton, which is 43% discount to the international prices in FY12. Moreover with change in pricing strategy from international price parity system to monthly pricing system will enable better realization in tight demand supply scenario. In spite of low pricing, the company enjoys EBITDA margin of ~79% due to its high grade iron ore and lower mining & processing cost.. We expect NMDC to maintain the margin at the current level with an upward biased.

Horizontal as well as vertical integration

The company is planning to grow organically as well as inorganically in both domestic as well as international market. In addition to the same the company has initiated step towards the forward integration towards pellet & steel manufacturing which is expected to add value to the both top line as well as bottom-line. The company's 3.2 MTPA (2+1.2MTPA) Pellet & 3 MTPA steel plants development is on stream at Chhattisgarh & Karnataka. The company is also aggressively looking to acquire various natural minerals resources across the world through Various JV, subsidiary and SPV model.

Valuation

Considering the demand supply dynamics of iron ore in the domestic market we feel NMDC would be most benefited going forward with high volume and better realization. Moreover the company's huge cash reserve of Rs 202 bn provides opportunity to the company for any future expansion (both organic & inorganic). The company is currently trading at price earnings multiple of 6.8x of its FY14e EPS and 2.6x EV/EBITDA of FY14e which is at the lower end of the valuation when compared to domestic & International Peers. The domestic & International peers are available at 6x EV/EBITDA. Being the leader in terms of both volume and quality, we expect NMDC to trade at 4x FY14e EV/EBITDA on conservative side, which implies a price of Rs 174 and upside of 24.3% from the current level. We recommend "BUY" on the stock.

Source : Equity Bulls

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