Company Update: NMDC Ltd - BUY - TP Rs.125 - Kotak

NMDC has revised prices of domestic iron ore thrice YTD, adding up to Rs300 and Rs350 per tonne for iron ore fines and lump ore to Rs2,960/tonne and Rs3,350/tonne, respectively. We believe that the recent hike in the iron ore prices is backed by 4% month on month increase in international iron ore prices, rupee depreciation and the surge in pellet prices (~4 years high / +25% YoY). Though, we continue to remain cautious on the outlook of iron ore prices for the medium to long term perspective. But, expect it to remain strong in the coming months, as Odisha miners has also hiked prices in the range of Rs250-300/tonne.

Key Highlights

- NMDC hiked the prices of iron ore by Rs150/tonne (~5%) for Lumps and Fines to Rs3,350/tonne and Rs2,960/tonne, respectively, both in Karnataka and Chhattisgarh.

- The company recently commissioned 1.2MT pellet plant and expect to sell 400-500KT in FY19E and will reach breakeven in FY20E at 60% utilisation level (700-800KT).

- July production declined ~36% YoY due to the monsoon, we expect costs pertaining to mine-closure expenses and contribution towards a District Mineral Fund likely to fall.

- Management indicated that, offtake in Karnataka has picked up in the month of Aug (declined 25% YoY in 1QFY19 due to lower offtake as steelmakers switched to imports) by one of the large steel maker in the state and souring by the steel plant in Vizag.

Outlook

Though, we expect NMDC's iron ore volume to grow at a CAGR of ~6% for the next three to five years, but expectations of weak prices due to increase in iron ore supply by the big miners from Australia and Brazil in the medium term would keep the seaborne iron ore market oversupplied. This, coupled with surplus production in domestic markets, supports our cautious view on iron ore. However, in the coming months, due to uptick in pellet prices, international iron ore prices and price hiked by Odisha miners, domestic iron ore prices are likely to remain strong and shall support NMDC's earnings. At CMP, the stock is trading at 5.4x and 5.8x FY19E and FY20E EV/EBITDA, which in our view factors all the possible negatives. We maintain BUY with an unchanged target price of Rs125, factoring the CWIP of steel plant at 50% of its investment and valuing in core business at 5.5x FY20E EBITDA.

Key Risks

- Lower than expected volume, realisation and increased in export duty on pellet sales.

Shares of NMDC LTD. was last trading in BSE at Rs.108.65 as compared to the previous close of Rs. 108.6. The total number of shares traded during the day was 316683 in over 2805 trades.

The stock hit an intraday high of Rs. 111.4 and intraday low of 107.5. The net turnover during the day was Rs. 34658380.

Source : Equity Bulls

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