NMDC Ltd: Downside limited

India Infoline News Service | Mumbai |

NMDC has corrected sharply on account of subdued domestic steel demand, Government’s divestment, volume disappointment in 9M FY13 and a sharp cut in iron ore lump prices in Q4 FY13.

CMP Rs104, Target Rs145, Upside 39%

Tight domestic iron ore market to benefit NMDC

India’s iron ore production which has been in the downward trend since FY12 declined 19% in FY13 to 143.6mn tons. On the other hand, domestic steel production has been increasing progressively leading to an increase in iron ore demand. As a result, iron ore exports which were minuscule in the past jumped to 8mn tons during April – Jan ’13 and forecasted to grow to 17mn tons in FY14. We believe the change in dynamics from a net exporter to net importer would benefit NMDC the most.


Volume and price disappointment to be minuscule

We believe the disappointment on both volumes and realizations is quite limited in the near term. We expect NMDC to announce price cuts over the next two months due to subdued demand in the domestic market. Post Q2 FY14 we don’t expect any price cuts in FY14. We estimate average realisation would form a bottom in Q2 FY14. Volumes recovered in Q4 FY13 and have been steady over the last two months. NMDC has sold ~5mn tons of iron ore in the first two months of FY14 after registering a 28.5% yoy growth in Q4 FY13. We expect volumes to increase in FY14 led by commissioning of the uni-flow system and higher contribution from Karnataka.


Correction overdone; High Cash and dividend to limit downside

NMDC has corrected sharply on account of subdued domestic steel demand, Government’s divestment, volume disappointment in 9M FY13 and a sharp cut in iron ore lump prices in Q4 FY13. We expect earnings to decline in FY14, before recovering in FY15 on the back of strong volume growth. Downside for the stock would be limited due to the huge cash balance and the high dividend yield for NMDC. Based on FY13, cash accounts for 50% of current market cap and dividend yield stands at 6.7%. Even after the cut in our earnings estimates, we believe valuations at 2.3x FY15E EV/EBIDTA are quite attractive and is at a huge discount to its peers. We value the company at 4.5x FY15E EV/EBIDTA and arrive at a revised 9-month price target of Rs145. Despite the cut in our target price, we still maintain our BUY recommendation as we see 39% upside to our revised target price from CMP.


Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Revenues
112,619
107,043
106,646
115,775
yoy growth (%)
(0.9)
(5.0)
(0.4)
8.6
Operating profit
89,821
73,780
69,190
74,699
OPM (%)
79.8
68.9
64.9
64.5
Reported PAT
73,728
63,424
61,844
67,084
yoy growth (%)
13.4
(14.0)
(2.5)
8.5
EPS (Rs)
  18.6
  16.0
  15.6
   16.9
P/E (x)
  5.6
  6.5
  6.7
  6.1
EV/EBITDA (x)
  2.3
  2.7
  2.7
  2.3
Cash per share (Rs)
  51.1
   53.0
  56.5
  59.8
RoE (%)
  33.8
  24.4
  21.0
  20.1
RoCE (%)
  49.6
  36.4
  31.3
  30.0
Source: Company, India Infoline Research
BSE 130.65 2.20 (1.71%)
NSE 130.60 2.50 (1.95%)

***Note: This is a NSE Chart

 

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