NMDC - EBITDA/te peaks at Rs2980/te - ICICI Securities

NMDC surprised with a Q3FY21 EBITDA at Rs 28bn against Rs25bn expected. The key surprise has been realisations. Higher sales in Nov and Dec,'21 allowed for higher blended realisation than expected. EBITDA doubled QoQ to ~ Rs 2980/te because of sharp increase in realisations in Q3FY21. However, this also signals a near peak EBITDA/te with increasing Odisha production, reduction in iron ore price by Odisha miners and reduction in secondary (long product) prices. Subsequently NMDC has reduced iron ore prices at Feb, '21 by ~ 11%. There has been no resolution on 22.5% premium imposition on renewal of Donimalai mines and its corresponding impact on Chattisgarh mining. We maintain HOLD with a revised target of Rs 114/share (From Rs 103/share earlier).

- Substantial price hikes have taken EBITDA to ~ Rs2980/te from Rs1559/te QoQ. Q3FY21 witnessed 40% QoQ and 10% YoY increase in iron ore sales. Chattisgarh has driven the majority of the increase (characteristic of H2). NMDC has announced price hikes totaling ~Rs3,450/te in lumps since May'20 (53%). Q3FY21 witnessed only ~Rs1280/te QoQ realisation increase. This has reflected in EBITDA/te nearly doubling QoQ. However, with increasing iron ore production out of Odisha (auctioned iron ore mines), reducing scrap prices and corresponding reduction in secondary (long) product prices and reduction in iron ore prices from competition in Odisha led to ~ Rs 600-700/te (~11%) reduction in lumps/DR CLO prices out of Chattisgarh for NMDC in Feb, '21. The EBITDA/te appears to have peaked for the interim.

- 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, recently completed buyback - all these factors were prospective for the investment thesis of NMDC. Yet, the incident of imposition of 22.5% additional premium for renewal of Donimalai mines created the single biggest overhang on the stock. While a committee decides on the final rate 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.112.45 as compared to the previous close of Rs. 113.45. The total number of shares traded during the day was 458900 in over 2736 trades.

The stock hit an intraday high of Rs. 114.4 and intraday low of 111.8. The net turnover during the day was Rs. 51949476.

Source : Equity Bulls

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