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Research
Buy NMDC - Prabhudas Lilladher
Posted On : 2014-03-29 02:33:19( TIMEZONE : IST )
NMDC is the largest and one of the efficient iron ore producers in the country with best infrastructure and hassle-free operations in place. We are initiating coverage on NMDC with a "BUY" rating and target price of Rs158. With an improved demand outlook and reduced domestic supplies, we expect domestic prices to remain firm. Backed by lean operations and efficient infrastructure, NMDC is expected to be the biggest beneficiary of firm prices. This, coupled with a strong balance sheet (cash of Rs48/share), attractive dividend yield at 6% and undemanding valuations, substantiates our positive recommendation on the stock. We value the stock at Rs158, EV/EBITDA of 5.0x FY15E.
- Chinese ore demand on a strong footing: China's iron ore imports grew 10% in CY13 to 820m tonnes against a demand of 1150m tonnes. We expect China's iron ore consumption to grow at 6% in 2014 and 2015 on the back of 5% growth in steel production, keeping the international prices firm.
- High Chinese iron ore production costs to keep international prices elevated: Chinese iron ore production is at an average cash cost of US$100-110/t against the global average of US$50-60/t (CFR) due to low Fe content. Given the high cost of Chinese ore and strong demand, we expect iron ore prices to trade in the range of US$110-120/t
- Concerns on over-supply overdone: While the announced capacity additions amount to ~450m tonnes over the next 3-4 years, given the current status of projects, we expect net incremental production to grow effectively by 360m tonnes in 2014-2016 against an incremental demand of 200m tonnes. Excess supplies would be balanced by closure of uncompetitive Chinese production (50% of capacity i.e. 160m tonnes having cash cost>US$110/t) and displacement of high cost supplies from Canada, CIS, etc.
- Structural play on reduced domestic supplies: Led by reduced supplies and depreciation in Rupee, NMDC hiked prices by 10% during Sep 2013-Mar 2014. We expect prices to remain firm on the back of impending risk to iron ore mining in Odisha and slow resumption of mining in Karnataka.
