NMDC (Q1 FY13)

CMP Rs186, Target Rs208, Upside 11.9% 

• Topline for the quarter increased 2.1% yoy to Rs28.5bn as the impact of lower volumes was offset by higher realisations. The company’s iron ore sales volume declined 1.4% yoy to 6.9mn tons. On a qoq basis, sales volume increased 7.1% qoq as previous quarter production was impacted by Maoist movement. Production declined marginally on a yoy basis to 6.1mn tons, but 13.5% lower on a qoq basis. Blended realisations for the quarter stood at Rs4,143/ton, lower than our estimate. We believe the lower than expected realisation would be largely due to higher sales of iron ore fines.

• Operating profit increased by 2.1% yoy to Rs23bn led by higher realisations. EBIDTA/ton expanded from Rs3,090/ton in Q4 FY12 to Rs3,358/ton due to higher realizations and a decline in all major costs. Costs per ton of ore declined sharply from Rs964/ton in Q4 FY12 to Rs785/ton during the quarter. On a yoy basis, EBIDTA/ton was higher as the impact of higher costs was more than offset by strong realisations.
  
• We revise estimates over the next two years incorporating the decline in global iron ore prices and slower growth in volumes. The company’s performance has been consistently impacted by the Maoist activities in Chattisgarh. In addition to this, the ramp up in Karnataka has been slower than expected. We now estimate FY13 volumes to be 29.5mn tons and FY14 at 32mn tons. NMDC has increased its iron ore prices for fines and lumps from April ’12 onwards. We believe the company would continue to report strong earnings over the next two years and maintain our BUY rating with a 9-month price target of Rs208.