NMDC Ltd (Q4 FY14)

India Infoline News Service | Mumbai |

NMDC continued to report strong revenue growth during the quarter on the back of strong iron ore volumes and higher blended realisations.

CMP Rs170, Target Rs190, Upside 11.7% 
  • NMDC’s topline of Rs38.8bn was marginally higher than our estimate led by higher than expected blended realisations

  • Sales volume jumped 14.1% yoy to 9.4mn tons boosted by the restart of the slurry pipeline; Production increased 3% yoy to 9.9mn tons

  • NMDC exported 0.7mn tons of iron ore against 0.9mn tons in Q4 FY13 and 0.4mn tons in Q3 FY14 on account of strong domestic demand

  • The impact of higher blended realisations on EBIDTA/ton was offset by a jump in employee costs and higher other expenditure

  • NMDC has lowered prices of lumps in May by Rs200/ton; we expect the company to announce price hikes for June ‘14

  • NMDC to benefit from the current tightness in the domestic iron ore market; Maintain BUY with a revised price target of Rs190.

Result table
(Rs mn) Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Net sales 38,845 32,043 21.2 28,232 37.6
Material costs (644) (350) 83.8 (862) (25.3)
Personnel costs (2,559) (1,615) 58.5 (1,574) 62.6
Selling expenses (4,467) (3,929) 13.7 (2,432) 83.7
Other overheads (6,478) (4,593) 41.0 (4,336) 49.4
Operating profit 24,697 21,556 14.6 19,028 29.8
OPM (%) 63.6 67.3 (369) bps 67.4 (382) bps
Depreciation (431) (387) 11.4 (362) 19.2
Interest (19) (132) (86.0) - -
Other income 5,275 5,474 (3.6) 5,077 3.9
PBT 29,523 26,511 11.4 23,743 24.3
Tax (10,356) (7,804) 32.7 (8,070) 28.3
Effective tax rate (%) 35.1 29.4 34.0
Adjusted PAT 19,167 18,707 2.5 15,673 22.3
Adj. PAT margin (%) 49.3 58.4 (904) bps 55.5 (617) bps
Extra ordinary items 455 (4,058) - - -
Reported PAT 19,621 14,650 33.9 15,673 25.2
Ann. EPS (Rs) 19.3 18.9   2.5 15.8   22.3
Source: Company, India Infoline Research

Jump in sales volume boost topline by 37.9% yoy

NMDC continued to report strong revenue growth during the quarter on the back of strong iron ore volumes and higher blended realisations. NMDC managed to register a growth of 14.1% yoy to 9.4mn tons, it highest ever quarterly iron ore volume sales, boosted by the resumption of the slurry pipeline and higher demand in Karntaka. For the full year, NMDC managed to register a growth of 16% yoy in sales volume. Blended realisations were higher by 6.3% yoy and 7.5% qoq to Rs4,132/tons led by price hikes taken by the end of Q3 FY14 and at the start of Q4 FY14 for fines. Price increase was also supported by the increase in e-auction prices in Karnataka. NMDC exported 0.7mn tons of iron ore against 0.9mn tons in Q4 FY13 and 0.4mn tons in Q3 FY14 on account of strong domestic demand. NMDC has lowered prices of lumps by Rs200/ton in May ‘14. We expect price hikes in June due to the tightness in the domestic market caused by the closure of few merchant mines in Odisha.

Impact of higher realisations on EBIDTA/ton was offset by a jump in employee costs and higher other expenditure

Operating profit for quarter was higher by 14.6% yoy and 29.8% qoq to Rs24.7bn led by strong sales volume and higher realisations. It was inline with our estimate as the impact of higher than expected realisations was offset by an increase in employee costs and other expenditure. Employee costs for the quarter jumped 62.6% qoq to Rs2.6n, which was a negative surprise for us. Other expenditure too was quite high at Rs6.5bn, an increase of 41% yoy and 49.4% qoq. We are a bit surprised by the sharp increase in the above two expenditure heads. As a result, the expansion in EBIDTA/ton was restricted at 1.4% qoq and 0.4% yoy to Rs2,627/ton. We believe that going forward margins would improve due to higher blended realisations.


Cost Analysis
As a % of net sales Q4 FY14 Q4 FY13 bps yoy Q3 FY14 bps qoq
Production volumes (mn tons) 9.9 9.6 3.0 7.3 35.1
Sales volume (mn tons) 9.4 8.2 14.1 7.3 28.0
Realisation (Rs/ton) 4,132 3,889 6.3 3,844 7.5
Costs (Rs/ton) 1,505 1,273 18.3 1,253 20.1
EBIDTA/ton (RS/ton) 2,627 2,616 0.4 2,591 1.4
Source: Company, India Infoline Research

Cost Analysis
As a % of net sales Q4 FY14 Q4 FY13 bps yoy Q3 FY14 bps qoq
Material costs 1.7 1.1 56 3.1 (140)
Personnel costs 6.6 5.0 155 5.6 101
Selling expenses 11.5 12.3 (76) 8.6 289
Other overheads 16.7 14.3 234 15.4 132
Total costs 36.4 32.7 369 32.6 382
Source: Company, India Infoline Research

Earnings to remain strong

The domestic iron ore market has remained tight over the last two years on account of the regulatory restriction placed by the various government agencies. The recent SC ruling in Odisha would impact ~60% of the total iron ore output in the state (Odisha accounted for 50% of total iron ore produced in India) and would lead to supply shortage in the market. Though we expect captive miners to resume operation in a quarter, we expect renewal of mining leases of merchant miners would be quite difficult due to the value addition clause put in by the state government. As a result, we believe the impact of the sharp decline in global iron ore prices on domestic iron ore prices would be minimal. Resumption of slurry pipeline will add 8mtpa of logistics capacity and would help in debottlenecking its operations. This coupled with strong demand in the Karnataka region would boost volumes over the next two years. We estimate earnings to increase sharply over the next two years as the company is expected to benefit from the tight domestic iron ore market and the volume growth in the Odisha. The company deserves a re-rating due to the strong volume growth and the tight iron ore market situation in the country. Maintain BUY with a revised price target of Rs190.


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E
Revenues 107,042 120,582 136,175 141,677
yoy growth (%) (5.0) 12.6 12.9 4.0
Operating profit 73,751 77,702 91,152 93,710
OPM (%) 68.9 64.4 66.9 66.1
Pre-exceptional PAT 63,404 63,677 72,912 75,103
Reported PAT 63,423 64,132 72,912 75,103
yoy growth (%) (12.7) 1.1 13.7 3.0
         
EPS (Rs)    16.0   16.1   18.4   18.9
P/E (x)   10.6   10.6   9.2   9.0
Price/Book (x)   2.4   2.2   1.9    1.7
EV/EBITDA (x)   6.3   6.3   5.1   4.9
Cash per share (Rs)   53.0   47.1   51.9   55.2
RoE (%)   24.4   22.1   22.6   20.3
RoCE (%)   36.4   33.6   34.3   30.9
Source: Company, India Infoline Research
NSE 128.10 [0.50] ([0.39]%)

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