NMDC management reiterated its earlier production guidance of 30-32mn tons in FY14 on the back of higher contribution from Chattisgarh. The company expects Chattisgarh sales to be ~21-23mn tons and that from Karnataka at 9mn tons. The company has already clocked 11mn tons during the period April-August ’13, 13% higher on a yoy basis. NMDC plans to boost its sales volume on the back of higher availability of rail rakes in Chattisgarh. It expects rake availability to be higher at 19-20rakes/day from 17rakes/day in Q1 FY14 and 15rakes/day in FY13. However, we believe demand for iron ore lumps would remain subdued during the year and would lead to lower than expected sales. We have marginally increased our sales volume forecast from 27.5mn tons to 28.5mn tons in FY14 and from 30mn tons in FY15 to 31mn tons.

Iron ore pricing to remain under pressure in the near term due to subdued demand from the sponge iron producers and competitive prices of pellets. The management guided that iron ore pellet prices have declined sharply in Orissa on account of availability of cheaper iron ore fines. As a result, sponge iron producers prefer pellets to lumps in Orissa. In addition to this, sales of lumps have been lower from the Kumarswamy mines. The management expects prices to remain at current levels in the near term, even after the price hikes taken by 4-5 major miners in Orissa. NMDC prices are already at a premium to the local iron ore miners in Orissa. We have lowered our price estimate for domestic sales due to the subdued demand for iron ore lumps and increased our export price realisation due to the weaker rupee in FY14. As a result, we expect average blended realisations to decline 5.8% yoy in FY14 and expect it to decline marginally by 1.4% in FY15.

The management has maintained that production from Karnataka would not be impacted by the recent CEC formula. It believes that the cap on Karnataka mining would be ~9-10mn tons after the recent increase in reserves of Kumarswamy mines. NMDC has submitted its reports to the Indian Bureau of Mines (IBM) to increase its mineable reserves to 121mn tons. This would help it to increase the cap on mining in Kumarswamy mines as per CEC’s formula to 4.5mn tons.

Capex incurred during Q1 FY14 stood at Rs5.2bn, of which Rs4.6bn was spent on the steel project. It expects FY14 capex at Rs27bn and then expects it to jump to Rs60bn in FY15. We believe that the capex guidance is quite aggressive and expect the company to miss on its capex guidance. The steel project is expected to be delayed and would lead to lower capex for the company.

We maintain our positive stand on the company post the analyst meet. The impact of lower realisations on earnings was offset by an increase in our volume estimate. The recent depreciation in the rupee and the bounce back in global iron ore prices provides support to the company’s near term performance. At the current stock price, the market seems to be building in too much pessimism into the stock. The stock is currently trading at 3.3x FY15E EV/EBIDTA, which is at a huge discount to its historical one year forward EV/EBIDTA of 12.6 and also to its peers. We value the company at 4.5x FY15E EV/EBIDTA and arrive at a 9-month price target of Rs145.