IDFC Securities - NMDC (NMDC) NMDCs Q3FY19 results (Outperformer) - Favorable macro; awaiting court order

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IDFC Securities

Ashish Kejriwal

NMDC's Q3FY19 results (Outperformer) - Favorable macro; awaiting court order

Q3FY19 result highlights- Sale of high grade iron ore boost profits

Higher-than-expected iron ore realisation due to sale of higher grade iron ore lumps led to a beat of 16% to our EBITDA estimates.

NMDC reported EBITDA of Rs21.5bn, up 78% yoy (EBITDA/t of Rs2,476, up 65% yoy) due to higher iron ore prices (up 38% yoy to Rs4,159/t) and higher volume (up 8% yoy to 8.7mt). Also, the share of volume were higher from more profitable Chhattisgarh mines (72% in Q3FY19 v/s 63% in Q3FY18 and 56% in Q2FY19), thereby, inflating EBITDA.
While average domestic lumps prices (ex-royalty) were up Rs444/t qoq to Rs3,892/t, fines prices (ex-royalty) were up by Rs392/t to Rs3,152/t. As a result, domestic iron ore realisation (ex-royalty) was up by Rs400/t qoq to Rs3,398/t. Blended realisation was higher than usual due to sale of higher grade of iron ore lumps (above 65% Fe).
Sales volumes were higher in Chhattisgarh (up 24% yoy to 6.3mt) as Q3FY18 had a volume loss due to railway line disruption. Volumes were lower in Karnataka (down 20% yoy to 2.4mt) due to non-operation of Donnimalai mine since November 2018. NMDC exported 0.66mt in Q3FY19 v/s 0.53mt in Q3FY18.
Tax rate stood at 28.7%. Higher operating profit led net profit to increase by 100% yoy to Rs15.8bn.

Key positives: Higher sale of high grade iron ore lumps and volume

Key negatives: Iron ore price cut of Rs750-950/t in Dec’18 & Jan’19

Impact on financials: Increase FY19 EBITDA by 4.5%.

Valuation & view: Retain Outperformer with TP of Rs160

We expect NMDC’s profitability to decline in Q4FY19 as NMDC has cut prices by Rs750-950/t in Chhattisgarh since December 2018. However, with the global macro environment turning conducive for iron ore, we expect no further correction in NMDC’s iron ore prices. Rather, we have assumed Rs100/t higher realisation in FY20E. We expect the Karnataka High Court to rule in favour of NMDC (on issue of Donimalai mine), which will remove uncertainty on future merchant mining operations in India (next hearing is scheduled on 11 Feb 2019).The company’s 3-mtpa steel plant is expected to be commissioned by FY20-end. Our target price stands at Rs160/sh, valuing the iron ore business at 5.5x FY20E EV/EBITDA (Rs128/sh) and investments in the steel plant at Rs32/sh (50% of FY20E CWIP).

05/02/2019 6 EN

Underlying

NMDC

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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INE584A01023 National Stock Exchange of India India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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Analysts

Ashish Kejriwal

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