NMDC - A single headwind against investment thesis - ICICI Securities

NMDC surprised with a 10% higher EBITDA for Q2FY21 at Rs10.3bn (I-Sec Rs9.4bn). Lower than expected costs, through lower provisions, helped the EBITDA beat. EBITDA/te at Rs1,559 was 8% higher than expected. On the back of ~69% price hikes since May'20, NMDC's spot EBITDA is >Rs2,000/te. Continued shortage in domestic iron ore and resilient global pricing would have made NMDC the prime domestic iron ore play, but for the 22.5% premium imposition on renewal of Donimalai mines. NMDC's Board has approved buyback of 131.2mn shares (representing 4.3% of the fully paid-up equity shares) at a price of Rs105/share (~11% premium over CMP); the total buyback size stands at Rs13.8bn. With a single headwind marring multiple tailwinds - we maintain HOLD.

- Substantial price hikes will improve EBITDA profile of NMDC in the coming quarters. NMDC has announced price hikes totaling ~Rs1,350/te since May'20 (69%). Q2FY21 witnessed only ~Rs350/te QoQ realisation increase. Given the current steel spreads, the slow ramp-up of iron ore production in Odisha (including ~20mnte of capacity being uneconomical) and elevated iron ore prices globally, we do see some pathway for domestic prices to consolidate at current levels. Spot EBITDA has already crossed Rs2,000/te. We expect FCF generation to be healthy at these EBITDA/te levels.

- Demerger of steel plant can lead to value unlocking. The in-principle approval by the Board of NMDC to demerge the steel plant, i.e. creating a separate listed company with a shareholding eventually akin to NMDC, will be value-accretive to the minority shareholders. If pursued in a time-bound manner, this can lead to: i) separate avenues of fund raising for the Government of India; ii) allowing FCF yield and correspondingly the dividend yield of NMDC to increase substantially (we have already seen NMDC raising NCDs for completion of the steel project; all incremental capex for the steel plant can be self-funded by the demerged entity); and iii) improve return ratios of the mining entity substantially (allowing investors a better pureplay mining opportunity). We see execution as the key risk.

- Multiple tailwinds marred by a single headwind. A strong EBITDA trajectory, possible valuation upside on demerger of steel plant, announced buyback at ~11% premium to CMP - all these factors were prospective for the investment thesis of NMDC. Yet, the single incident of imposition of 22.5% additional premium for renewal of Donimalai mines creates the single biggest overhang on the stock. While a committee decides on the final rate (report expected in Nov'20) to be instituted via change in MMDR, we have factored-in 22.5% additional premium across NMDC's mines. Maintain HOLD.

Shares of NMDC LTD. was last trading in BSE at Rs.96.05 as compared to the previous close of Rs. 94. The total number of shares traded during the day was 1089905 in over 5903 trades.

The stock hit an intraday high of Rs. 97.05 and intraday low of 93.5. The net turnover during the day was Rs. 104712546.

Source : Equity Bulls

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