NMDC - Upside risk to volume estimates - Edelweiss

In its post Q3FY14 analyst meet today, NMDC guided for no correction in domestic iron ore fines prices despite sharp cuts in international prices, but marginal correction in lumps. Our forward price assumptions are more conservative than management guidance. While the company maintained FY15 base case sales volume guidance of 32mt, volumes may touch 35mt if the 8mtpa slurry pipeline, which restarted in January 2014, sustains. Management indicated reasonable confidence in this pipeline delivering volumes of 6mt in FY15E. FY16 volume guidance was 38mt against our 34mt estimate. At CMP, NMDC has dividend yield of 6.5% and trades at inexpensive 4.2x FY16E EV/EBITDA. We maintain 'BUY' with target price of INR170 (5.5x FY16E EV/EBITDA), implying ~30% upside.

No risk to fines price; marginal correction expected in lumps

NMDC anticipates no correction in domestic iron ore fines prices due to strong demand and discount to import parity. Lumps demand has softened in the near term, which may trigger marginal price correction. We have assumed lumps prices to correct 6% from current level in our estimates.

FY15E volumes may touch 35mt with restart of slurry pipeline

Management maintained sales volume for FY14/FY15E at 30mt/32mt with FY15E volumes touching 35mt if Essar Steel's 8mtpa slurry pipeline, which restarted in January, sustains. FY16E volumes expected at 38mt (our estimate: 34mt).

Outlook and valuations: Value pick; maintain 'BUY'

NMDC has declared interim dividend of INR8.5 in FY14 and expects to maintain the same going forward (our assumption: INR6.5), implying dividend yield of 6.5%. Management indicated that payout ratio (including dividend tax) could be ~75%. The stock is available at inexpensive valuation of 4.2x FY16E EV/EBITDA. We maintain our estimates and our 'BUY/SO' recommendation/rating with target price of INR170 (based on 5.5x FY16E EV/EBITDA), implying ~30% upside from current level.

Source : Equity Bulls

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