Company update: NMDC (Outperformer) - Opportunity to buy; Judgment could be favourable

An expected positive outcome on Donimalai mines and a favourable macro environment (which has caused iron ore prices to firm up) have led to 15% rise in NMDC’s share price from its lows in Feb 2019. We see further >50% upside post the final outcome on Donimalai mines (which we believe should be favourable) and commencement of the company’s 3mtpa steel plant (by FY20-end). Post completion of buyback worth Rs10bn (Rs98/sh) in Feb 2019, we expect NMDC to declare an interim dividend of ~Rs5/sh in Mar 2019, which implies a dividend yield of ~5%. At 4.6x FY20E EV/EBITDA, NMDC currently provides an attractive buying opportunity. We raise our FY19E EPS by 4.5% primarily to factor in higher volume. We reiterate our Outperformer rating on the stock with a target price of Rs160.

Outcome on Donimalai mine soon; likely positive for NMDC: On 26 Feb 2019, Karnataka High Court completed the hearing on Donimalai mine (NMDC has contested Karnataka government’s pre-condition of renewing the mine, i.e., NMDC shall remit 80% of sale value of iron ore as lease rental payment to the government) but has reserved the judgement. We expect the judgement to be announced sometime in Mar 2019 and in favour of NMDC. We have pencilled in resumption of mining from the Donimalai mines FY20E beginning onwards. A favourable outcome should eliminate fears on NMDC’s merchant mining operations as its Chhattisgarh mines are set to be renewed by Mar’20 and Kumaraswamy mine at Karnataka by Oct’22.

Favourable macro induces price rise: Post a slew of price cuts in early Feb 2019, NMDC effected a price hike of Rs400/t in both lumps & fines from 23 Feb 2019. We expect iron ore prices to remain firm in the domestic market. NMDC sold ~3.5mt iron ore in Feb 2019 and expects sale of ~3.2mt in Mar 2019, taking total sales volumes to 32mt in FY19. We have thus raised our volume numbers to 32mt (earlier 31mt) and 37mt in FY19E and FY20E, respectively.

Reiterate Outperformer with a target price of Rs160/sh: We believe the judgement on the Donimalai issue will be favourable and subside concerns on future lease renewals of NMDC’s mines. NMDC should be able to sustain the higher iron ore prices, given its competitive pricing versus Odisha miners as well as strong global iron ore prices. We reiterate our Outperformer rating on the stock and value the iron ore business at 5.5x FY20E EV/EBITDA (Rs127/sh) and investments in the steel plant at Rs33/sh (50% of FY20E CWIP).