NMDC: Healthy volumes; near term price support

28 Sep 2023 , 11:10 AM

Recommendation: Buy; Target Price: Rs 170

 

NMDC’s recent price hike of 6.5-7.7% is backed by the strength in global iron ore prices, and could hold steady for some time, given the 38% discount vs the landed cost of imports. At 17.7mt, M5FY24 offtake has been healthy (up 32%/12% vs M5FY23/22). Analysts of IIFL Capital Services see incremental demand support from Nagarnar steel plant ramp-up and commissioning of JSTL’s M5tpa Vijaynagar expansion by end FY24. For FY24/25, analysts of IIFL Capital Services raise Ebitda estimates by 6%, led by higher price assumption for iron ore in the near term. Strong FCF should support healthy DPS of ~Rs10 incrementally. BUY with TP of Rs170/share. 

Healthy volume in M5FY24:

Over April-Aug 2023, NMDC has posted production/sales of 16.55/17.72mt – up 23%/32% YoY on a low base (demand impacted by export duty). Compared to FY21, analysts of IIFL Capital Services have seen a production/offtake growth of 10%/12%, which is still healthy. At this run rate, the company is well-placed to come close to its FY24 guidance of 47-49mt. Going ahead, production will get a boost from the receipt of approvals to operationalise Kumaraswamy extension (from 7mt to 10mt). Demand should be supported by Nagarnar Steel plant ramp-up through FY24-25 and JSTL’s Vijaynagar expansion, post FY24. 

Healthy near-term price outlook: 

Following the recent mid-Sep price hike of 6.5%/7.7% for lumps and fines, prices are back to Jul’23 levels. This was supported by rise in global iron ore prices and pellet prices, which has supported exports of pellets from India. Current domestic prices for iron ore are at ~38% discount to the landed cost of imports vs average discount of 15% over the past 10 years; and hence, presents further upside risk to iron ore prices. Over the longer term, analysts of IIFL Capital Services expect realisations to be trending down, led by rising supplies. 

Analysts of IIFL Capital Services raise estimate by 6% for FY24/25: 

Analysts of IIFL Capital Services raise their Ebitda estimates for FY24/25 by ~6%, led largely by the assumption of higher prices for iron ore. They raise the TP to Rs170/share, based on 5.5x EV/Ebitda multiple to Sep’25 Ebitda. Strong FCF generation should support DPS of ~Rs10 and still hold the healthy net cash balance steady for the company over FY23-26.