NMDC - Iron Ore Price Cut Again, But Valuation Attractive; Retain Buy - Nirmal Bang

NMDC has cut the prices of lumps and fines by Rs200/tn (4.3%) and Rs100/tn (3.8%), respectively, for the month of July 2013 because of weak demand from the steel sector. The price cut remains a bit surprising considering the steady volume growth of 5.8% witnessed in 1QFY14, but we believe that 14% and 39% correction in the share price over the past one month and six months, respectively, (as compared to 1% and 3% fall, respectively, in Nifty in the same period), factors in the the subdued pricing environment. We have revised our realisation assumptions downward by 4%/3% for FY14E/FY15E, respectively, leading to a 8% drop in EBITDA for FY14E and FY15E each. Our PAT estimates for FY14E and FY15E have also been revised downward by 6% each. We have also cut our target price from Rs164 to Rs147 following the reduction in our earning estimates and the cut in EV/EBITDA multiple from 4.8x FY15E to 4.5x FY15E on account of subdued earnings growth profile and deteriorating return ratios. We have also lowered the value of steel business CWIP from 80% to 60% on concerns over the delay in plant commissioning and subdued return ratios. Our revised target price of Rs147 is 47% above the current market price.

Steady volume growth in 1QFY14: NMDC has posted a miniscule 0.3% YoY growth in iron ore production at 6.83mt, primarily driven by the increase in Karnataka iron ore production to the tune of 4.8% YoY at 2.17mt. Chhattisgarh iron ore production was down 1.7% YoY at 4.66mt in 1QFY14. In terms of sales volume, the company posted a 5.8% YoY jump at 7.26mt. The Karnataka region witnessed a 13.8% YoY jump in iron ore sales volume at 2.23mt, while the Chhattisgarh region posted a 2.7% YoY jump at 5.03mt.

Volume risk receding: The steady iron ore volume growth in 1QFY14 and a further cut in iron ore price should enable steady volume growth in the coming quarters. We are assuming 8%/7% growth in iron ore volume in FY14E/FY15E at 28mt/30mt, respectively.

Dividend yield should cushion downside: NMDC has given Rs7/share as dividend for FY13 and we expect a similar trend to continue in the coming years as well. This will result in a 7% dividend yield at the current market price, which we believe is quite attractive and hence the downside on the stock is likely to be protected.

Valuation turns attractive: NMDC stock currently trades at P/E multiples of 6.6x and 6.5x FY14E and FY15E earnings, respectively, while EV/EBITDA multiples are at 2.4x and 2.6x, respectively, for the same period. Post follow-on public offer of shares in March 2010, the stock traded at average P/E and EV/EBITDA of 11.8x and 7.2x, respectively, while the current multiples are 2SD (standard deviation) below average. Considering the attractive valuation and high dividend yield, we have retained our Buy recommendation on the stock.

Source : Equity Bulls

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