NMDC - Fines prices unchanged, lumps prices cut by 2.5% - SBIcap Securities

NMDC has cut prices of iron ore lumps by ~2.5% (Rs100-110/ton) for the month of March 2013 while keeping fines prices unchanged. We believe that downwards revision in iron ore lump prices have been led by lower demand from steel makers due to sub-dued steel prices. We are of the view that iron ore fines prices will be remain under pressure going ahead due to inventory liquidation in Odisha. We revised our F14e estimates downwards on back of lower realisation and introduce F15e numbers.

Higher inventory led to cut in lump prices: Downwards revision in iron ore lumps prices for the month of March 2013, in our view could be due to lower demand from chhattisgarh based steel manufacturers. The other reason for revising price downwards is to ensure more sales of lump ore as stocks were piling in the pitheads of company's mines in the absence of buoyant demand from domestic steel makers (lumps inventory stands at 2 MT). The revision in prices is applicable only in Chhattisgarh, as Karnataka sales are through e-auction route.

Fines prices to be under pressure: We were surprised with the downward revision in high grade iron ore (lumps) prices, as we were expecting fines prices to be revised downwards on back of liquidation of iron ore inventory in Odisha. In the month of February 2013, the Odisha State Government allowed liquidation of stocks raised till October 2012. We expect this to have a near term pressure on fines prices as NMDC sells 65% of fines, but submission of Shah Commission report may have impact on ore supplies which can augur well for NMDC.

Estimates revised downwards and introduced F15e: On back of downwards revision in prices, we revised our F14e estimates downwards by 2.5% to Rs15.9 and introduced F15e with EPS of Rs17.7. We have assumed iron ore sales volume to be 28MT/34MT for F14/F15 respectively and blended realization of Rs3,680 / Rs3,620 per tonne for F14e/F15e.

Inexpensive valuation; maintain BUY: At CMP, stock trades at a P/E of 8.7x F14e earnings and 4.1x F14e EV/EBITDA, which we believe its inexpensive compared to its global peers who trade at 5.5x on year forward EV/EBITDA. We believe post the Shah Commission report on Odisha iron ore mining activities, iron ore supply is likely to remain under constrained, which in our view will benefit NMDC. We maintain our BUY rating, with revised target price of Rs165 (earlier Rs180) factoring decline in ore prices.

Source : Equity Bulls

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