NMDC - Revival in volume growth likely to boost multiple - Avendus

Sales volume for the quarter ended Jun13 increased 5.8% y-o-y due to higher volumes from Karnataka mines and inventory liquidation. We forecast sales volume to rise 10% for FY14f. However, the 8% cut in domestic iron ore prices since Mar13 and transfer of 10% of sales proceeds from the Karnataka e-auction towards an SPV, as per a Supreme Court ruling, are likely to adversely impact the FY14f-FY15f EBITDA by 24.2% and net profit by 18.2%. We maintain our Buy rating, as the current valuation multiple discounts the uncertain iron ore price outlook, and the likely 10% volume growth in FY14f may boost the valuation multiple. Cash and cash equivalents of INR60, as on Mar14f, are likely to cushion the downside.

Volumes rise on inventory liquidation, more supply from Karnataka

Sales volume for the quarter ended Jun13 increased 5.8% y-o-y due to higher volumes of ore from Karnataka mines. The sales volume at Karnataka rose to 2.2mn tonnes, 13.8% y-o-y, whereas volumes from Chhattisgarh mines went up 2.7% to 5mn tonnes. Production increased 0.3%, as Chhattisgarh operations reported a 1.7% drop in production. A higher sales volume was achieved due to the inventory liquidation of 0.4mn tonnes. The company has a total inventory of more than 5mn tonnes, as on Jun13. We forecast sales volume for FY14f to rise 10% against the management guidance of 15%-20%.

Cut in ore prices, penalty for socio-economic damage impacts EBITDA

The international iron ore price outlook remains subdued on weak global steel demand. International iron ore prices have declined from the peak of cUSD150/tonne in Mar13 to USD120/tonne in Jul13. This has led NMDC to cut its blended realisations by 8%, despite the INR depreciation of more than 10%. Furthermore, we account for the 10% sale proceeds from the e-auction of iron ore in Karnataka towards a special purpose vehicle (SPV), as directed by the Supreme Court order of 18Apr13. The SPV is likely to utilise the funds towards infrastructure and socio-economic development in the area. To account for the impact of the weak iron ore price outlook and penalty, we have cut our FY14f-FY15f EBITDA estimates by 24.2%.

Uncertainty priced in, volume growth likely to boost valuation multiple

We cut our FY14f-FY15f net profit estimates by 18.2%. The current P/E and EV/EBITDA multiples of 6.4x and 2.3x its FY14f earnings, respectively, discount the uncertain outlook on iron ore prices. We forecast these multiples to expand on likely volume growth and stable ore prices. The historical (Jan12-Jul13) average EV/EBITDA of 5.7x and P/E of 10.4x is discounted by 20%, to reflect the weak iron ore price outlook. Applying the discounted multiples to the one-year forward EPS and EBITDA, we arrive at a Jun14 TP of INR143. Cash and cash equivalents of INR60, as on Mar14, are likely to cushion the downside. We maintain our Buy rating. Risks to our estimates are lower-than-estimated volumes and realisations in FY14f-FY15f.

Source : Equity Bulls

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