Event update: NMDC (Outperformer) - Resumption of Donimalai mines delayed

We present key takeaways from NMDC’s Q1FY20 post result concall.

• No uncertainties on renewal of mining leases in future: Karnataka HC’s decision in favour of NMDC has set aside the possibilities of imposition of special conditions on NMDC at the time of renewal of mines in Chhattisgarh and Karnataka. Company has already applied for the renewal of mines at Chhattisgarh which are due in March 2020
• No timeline given on Donimalai mine restart: Management informed that it is working with Karnataka Govt to renew the lease of Donimalai mines. However, due to severe floods in the state and change in Govt, it is facing delay to obtain necessary regulatory approvals from the Govt. Further, as the renewal is for 20 years i.e. till 2038 (EC and FC clearance available till 2027), needs to approach central Govt to renew the environmental and forest clearance. Management refrained from providing any timeline to restart the mine. We now factor in restart of mine in Q4FY20.
• Volume guidance: Management provided ex-Donimalai guidance of 30-32mt for FY20. During 4MFY20, it sold 11.2mt, up 28.8% yoy.
• Steel plant commissioning by Q1FY21: Management expects delay in commissioning of steel plant and expect to commission it not before Q1FY21. The company is working with BHEL on raw material handling and by product plants package. There is no issue in commissioning other major facilities in the plant. We have factored production to start in 2HFY21 and pencilled in 0.5mt volume in FY21.

Valuation & view: Retain Outperformer with TP of Rs158

Delay in resumption of Donimalai mine is negative. We expect it to resume operations in Q4FY20 (earlier from September 2019). Accordingly, we have reduced FY20e volumes by 2mt to 32.5mt. We expect domestic iron ore prices to remain stable in H2FY20. We expect NMDC’s 3-mtpa plant to commission by H1FY21E-end and accordingly factored in 0.5mt volumes in FY21e. We value the iron ore business at 5.0x FY21E EV/EBITDA (Rs132/sh) and investment in steel plant at 50% of investment value (Rs26/sh) and arrived at a revised target price of Rs158. At CMP, market doesn’t ascribe any value to investment in steel plant (Rs157bn- Rs52/sh till Q1FY20). At CMP, stock is available at 5% div yield. Reiterate Outperformer.