CMP Rs376

NMDC, a government-owned (98.4%) Navratna company is the country’s largest iron ore producer. NMDC has a large iron ore reserve base of 1,360mn tons and is blessed with high quality iron ore reserves (64-66% iron content). The company plans to increase its annual production from 30mtpa to ~50mtpa by 2015. Average operating costs for the company over the past four years are a mere US$6.3/ton. We believe the robust volume growth in the domestic steel market coupled with strong iron ore realizations globally, will lead to a strong earnings growth for the company. After reporting weaker numbers in FY10E, we expect the company to witness earnings CAGR of 36% over FY10-12. NMDC’s strong balance sheet will offer opportunities to grow inorganically. Cash balance of Rs127bn (Rs32/share) at the end of FY09 is expected to double by FY12. At the lower end of the price band, which is Rs300, NMDC will trade at 13.3x FY12 EV/EBIDTA, which is at a significant premium (100%) to its domestic and international peers. We believe that such high valuations even at the lower end of the band are unjustified.