NMDC's Q2FY20 results (Outperformer) - Near term triggers missing; inexpensive valuation

Q2FY20 result highlights- Absence of Donimalai volume and lower prices hit profits

• NMDC reported in-line EBITDA of Rs10.6bn, down 16% yoy primarily due to ~13% yoy lower volumes (5.8mt) on account of suspension of mining operations at Donimalai. EBITDA is further impacted by ~4% yoy lower domestic iron ore prices (Rs2,891/t).
• Average domestic iron ore realisation (ex-royalty) was down by Rs108/Rs25 yoy/qoq to Rs2,891/t. Export realisation stood at Rs6,371/t, up 5% qoq. NMDC's export realisations are pegged to Platts 65% Fe Index and follows previous quarter (-) 2 month pricing methodology.
• Sales volumes at 5.82mt were down 13.3% yoy due to non-operation of Donimalai mine during Q2FY20. Volume from Chhattisgarh mines, at 4mt, was up 5.4% yoy. Volumes from Kumaraswamy mine increased marginally to 1.8mt. Export volumes stood at 0.52mt (nil in Q2FY19).
• NMDC’s blended average realisation stood at Rs3,780/t, up 6% yoy due to higher export realisation. Derived cost/t stood at Rs2,032, up 16% yoy due to absence of exports in base quarter. As a result, EBITDA/t stood at Rs1,823, down 3% yoy.

Key positives: Higher volume from Chhattisgarh mines

Key Negatives: No volume from Donimalai mines, risk of penalty of Rs16.23bn to be paid if Supreme Court judgement in 2017 related to excess mining applies to NMDC

Valuation & view: Retain Outperformer with TP of Rs131

We believe that NMDC’s Chhattisgarh mines will not have any risk of renewal and will be done by Q4FY20. However, uncertainity remains on resumption of Donimalai mines as Karnataka government has not permitted the same yet despite amendment of Mineral (mining by Government Company) Rules, 2015 by Central government wherein it has made mandatory for state governments to extend the mining leases held by Government company. Moreover, Govt is trying its best not to disrupt iron ore supply amid ongoing Odisha mines auction which will restrict any meaningful increase in domestic iron ore prices. We have not built in any increase in iron ore prices in FY20. Its 3mtpa steel plant is expected to be completed by 1HFY21-end. The stock trades at 4.7x FY21E EV/EBITDA. We value the iron ore business at 5.0x EV/EBITDA FY21E (Rs105/sh) and investment in steel plant at Rs26/sh (50% of CWIP) and arrive at our target price of Rs131/sh. Reiterate Outperformer on cheap valuation.