Company update: NMDC (Outperformer) - Concerns overdone; Firm prices to offset volume decline
NMDC has corrected ~28% in last six months. The sharp fall in stock price was primarily due to concerns arising from correcting global iron ore prices and declining volumes at NMDC’s Karnataka mines. We believe concerns are overdone and the stock provides a favourable risk-reward ratio. We reiterate Outperformer rating on the stock with a target price of Rs154.
Global iron ore prices inch up; NMDC’s iron ore prices on a firm footing in Chhattisgarh: Post ~20% fall since Jan 2018, global iron ore (62% Fe) prices have inched up by ~5% last month to ~US$61/t. However, ~7% depreciation in the rupee, strong demand and supply constraints helped NMDC sustain the high prices at its Chhattisgarh mines. Currently, iron ore prices at NMDC’s Chhattisgarh mines (~65% of FY18 volume) are Rs50-100/t higher than in January 2018. Fines are currently priced at Rs 2,810/t and lumps at Rs3,200/t.
JSW Steel may resume offtake from NMDC’s Karnataka mines: Karnataka mines contributed ~35% (12.9mt) to NMDC’s FY18 volumes. During Q1FY19, volumes from Karnataka mines fell ~74% yoy to 0.9mt, as NMDC’s biggest customer, JSW Steel, bought very small quantities from the company. To lure JSW Steel, NMDC reduced prices of iron ore fines by Rs600/t (Rs300/t on 22June and Rs300/t on 25July 2018). Currently, iron ore fines at Karnataka (Rs2,660/t) are cheaper by Rs150/t than that prevailing at Chhattisgarh. While we expect JSW to resume buying iron ore from NMDC soon, NMDC should sell 9.0mt from Karnataka in FY19E (12.9mt in FY18).
No major risk to FY19E volumes: NMDC’s volumes from Chhattisgarh were adversely impacted during Q3FY18 for 2 months, due to disruption in railway line. Assuming no disruption in FY19, we believe higher volumes from Chhattisgarh mines (25mt, up 8% yoy) would partially offset the fall in volumes from Karnataka. As a result, we expect NMDC to sell 34mt in FY19E versus 36.1mt in FY18.
Reiterate Outperformer with target price of Rs154: With JSW Steel expected to resume the purchase of iron ore from NMDC’s Karnataka mines, any major fall in FY19 volumes should get restricted. NMDC’s 3mtpa steel plant is expected to start commissioning from FY20E onwards. We reduce FY19E EPS by 5% to factor in lower volumes. We value the iron ore business at 5.5x FY20E EV/EBITDA (Rs121/sh) and investments in the steel plant at Rs32/sh (50% of FY20E CWIP) to arrive at our fair value of Rs154. A 5% div yield is expected to support prices.
NMDC Limited is an India-based company engaged in mining of iron ore. The Company's segments include Iron Ore, and Other minerals & services. It is also engaged in the production and sale of diamond, sponge iron and wind power. Its projects under construction include Bailadila Deposit-11/B, Kumaraswamy Iron Ore Project, 1.2 million tons per annum (MTPA) Pellet Plant at Donimalai, 3.0 million tons per annum (MTPA) Integrated Steel Plant in Chhattisgarh, Panthal Magnesite Project, Screening Plant III at Kirandul Complex, Screening Plant II at Donimalai Complex, doubling of Railway Line between Kirandul and Jagdalpur, Steel Plant at Bellary and Rail Link between Dalli-Rajhara-Rowghat-Jagdalpur Railway Line Project. It proposes to diversify into other commodities, such as steel making raw materials (coking coal, manganese ore nickel); fertilizer raw materials (rock phosphate potash), and thermal coal. It also proposes to invest in raw materials, such as tungsten and rare earth minerals.
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