Domestic iron ore fines prices to remain firm
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. Mining in Goa remains banned whereas that in Karnataka has resumed but with limitations. The tight iron ore market situation would continue in FY15 as demand is expected to increase from new capacities coming on stream and a ramp in demand from the plants commissioned in FY14. Above this, the Shah commission has recommended for capping of Odhishaâ€™s iron ore output at 50-55mn tons, against the current production of 69mn tons. 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 in slurry pipeline operations to aid volume growth
NMDC in 11M FY14 has managed to achieve sales volume of 27.4mn tons (+17% yoy) and is on track to achieve its FY14 target of 30.5mn tons. The growth volume trajectory is expected to continue in FY15 led by higher volumes from its Kirandul mines. Resumption of slurry pipeline will add 8mtpa of logistics capacity and would help in debottlenecking its operations. As a result, the management remains confident of achieving sales volume of 35mn tons in FY15. However, due to the inconsistent performance of the pipeline in the past, we have kept our estimates lower at 32.5mn tons.
Higher volumes coupled with firm iron ore prices to boost earnings
We estimate earnings to increase by 8.2% yoy to Rs69.8bn in FY15 and 4.1% yoy to Rs72.7bn in FY16 as the company is expected to benefit from the tight domestic iron ore market. Volumes are expected to rise on the back of resumption in operations of the Slurry pipeline and increase in availability of rakes. Cash at 40% of current market cap and dividend yield stands at 6.1% would provide downside support to the stock. Valuations at 3.5x FY16E EV/EBIDTA are quite attractive and are at a discount to its peers (4.7x). We revise our price target to Rs158 based on 4.5x FY16E EV/EBIDTA and upgrade the stock to BUY from Market Performer.
| Y/e 31 Mar (Rs m)
| yoy growth (%)
|| 4.8 |
| Operating profit
|| 88,573 |
| OPM (%)
|| 65.9 |
| Pre-exceptional PAT
| Reported PAT
| yoy growth (%)
|| 4.1 |
| EPS (Rs)
| P/E (x)
| Price/Book (x)
| EV/EBITDA (x)
| RoE (%)
| RoCE (%)
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