NMDC's Q1FY19 results (Outperformer) - Volume recovery underway

Q1FY19 result highlights- Higher prices offset volume dip

• Despite sharp decline in iron ore volume (down 25% yoy), higher iron ore prices helped NMDC (NMDC IN) to report marginally better-than-expected  operating performance with EBITDA of Rs14.2bn and EBITDA/t of Rs2,058.
• Net sales, at Rs24.2bn, was down 15% yoy due to 25% yoy lower volume (6.92mt) as JSW Steel, the largest customer of NMDC’s Karnataka mines, have virtually stopped buying iron ore from it. The   higher blended iron ore realization at Rs3,463/t, up 13% yoy restricted the fall in revenue.
• EBITDA at Rs14.2bn, was down 5% yoy due to lower volume. However, higher realization and cost on control helped it to record EBITDA/t of Rs2,058, up 26% yoy. The absence of low margin export volume and 4% higher volume from more profitable Chhattisgarh mines helped in offsetting lower volume from Karnataka.

Key positives: Higher iron ore realisation, lower cost of mining

Key negatives: Lower volume from Karnataka mines, received show cause notice from District Collector, Dantewada, Chhattisgarh asking for fine of Rs72.4bn related to excess mining on the basis of Supreme Court judgment for Odisha miners

Valuation & view: Retain Outperformer with TP of Rs154

JSW Steel has started procuring iron ore from NMDC’s Karnataka mines which will limit the downside in volumes in FY19E. We assume 34mt of volume in FY19E which requires 5% yoy volume growth during August-March 2019. NMDC’s iron ore prices remain firm which more than offset the lower volume and will lead to 18% yoy increase in EBITDA in FY19E to Rs62.5bn. NMDC is of the strong opinion that the penalty is not applicable to them as their mines are in Chhattisgarh and the Supreme Court has not ruled anything for Chhattisgarh. We note that even SAIL, the another PSU, has deposited penalty amount for its Odisha mines and not for Chhattisgarh mines. We believe that CMP does not factor even the iron ore earnings and do not factor in the investment in upcoming 3-mtpa steel plant which is expected to be commissioned by FY20E. 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) and arrive at a fair value of Rs154. Reiterate Outperformer.