NMDC - 1QFY14 Results Update - Motilal Oswal

Margins intact despite price correction; lumps prices cut by 4%

Adjusted PAT above estimate: Adjusted PAT for 1QFY14 decreased 9% QoQ to INR15.7b, which was 4% above our estimate, due to better iron ore realization. Average iron ore realization was marginally higher QoQ mainly due to improved product mix despite prices cuts taken at the quarter's start. Iron ore realization increased by INR60 to INR3,904/t, while sales volume declined 12% QoQ to 7.3mt.

Margins aided by better sales mix and lower exports volume: Margins remained intact at USD47/ton due to better sales mix and lower export volumes. Lower margin iron ore exports declined from 0.9mt in 4QFY13 to 0.5mt in 1QFY14. EBITDA declined 12% QoQ to INR19.1b, which was higher than our estimate.

Lumps prices cut by 4%, fines remain flat: NMDC has announced prices cuts for lumps for August by 4%, while it has rolled over prices for fines. The price cut for lumps was expected in view of significant decline in market prices of pellet due to weaker demand. Pellet prices corrected by INR1,500/t over the last few months to INR6,100/t levels. We factor average realization to decline 6% QoQ in 2QFY14E.

Valuation attractive, dividend yield 7%; maintain Buy: We continue to believe that iron ore supply is getting tighter in India, which will help NMDC in maintaining strong margins. However, weakening steel demand will erode some margins. We expect EBITDA per ton to decline from USD54/t in FY13 to USD42/t in FY14E and USD40/t in FY15E. We expect NMDC to deliver ~8% volume CAGR during FY13-15E. Stock is trading at attractive 1.1x FY15E BV (RoE: 19%), an EV of 2.4x FY15E EBITDA and dividend yield of 7.4%. Maintain Buy.

Source : Equity Bulls

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