NMDC's Q3FY20 results (Outperformer) - Volume to drive earnings in FY21
Q3FY20 result highlights- lower realisations suppress EBITDA
- NMDC reported in-line EBITDA of Rs15.9bn, down 26% yoy primarily due to ~14% yoy lower iron ore prices (Rs3,557/t). EBITDA is further impacted by ~3.4% yoy lower volumes (8.4mt) due to absence of Donimalai mine at Karnataka.
- Average domestic iron ore realisation (ex-royalty) was down by Rs820/313 yoy/qoq to Rs2,578/t.
- Sales volumes at 8.4mt were down 3.4% yoy primarily due to non-operation of Donimalai mine during Q3FY20 (Donimalai remained operational for 1 month during Q3FY19). Volume from Chhattisgarh mines, at 6.7mt, was up 6.5% yoy.
- NMDC’s blended average realisation stood at Rs3,557/t, down 14.5% yoy. Derived cost/t stood at Rs1,682, down 2% yoy. As a result, EBITDA/t stood at Rs1,892, down 23.6% yoy.
- Company exercised option of lower tax rate @25.17% during the quarter. As a result, tax rate stood at 16% during the quarter due to adjustment of higher taxes paid in H1FY20. PAT stood at Rs13.76bn, down 12.7% yoy.
Key positives: Interim DPS of Rs5.29/sh; Higher volume from Chhattisgarh, price increase in January 2020
Key Negatives: No volume from Donimalai mines, lower iron ore prices
Impact on financials: Increase FY20e EBITDA by 7.1% to factor in increase in prices in January 2020
Valuation & view: Retain Outperformer with TP of Rs164
We do not foresee any risk for NMDC’s volume from its Chhattisgarh mines despite few of steel producers winning iron ore mines in an ongoing auction in Odisha. We also assume minimum disruption of iron ore supply post March 2020 and accordingly, do not expect any further rise in domestic iron ore prices. The presence of merchant miners will remain in Odisha but the bargaining power may reduce with most of the mines shifting hands to steel producers. NMDC’s 3mtpa steel plant is expected to start commercial production from FY22 (spent ~Rs164.6bn till Q3FY20).The market may start ascribing value to it soon. We reiterate our Outperformer rating on the stock with unchanged TP of Rs164. We value the iron ore business at 5.0x FY21E EV/EBITDA (Rs138/share) and investments in the steel plant at Rs26/share (50% of CWIP). The continuous sale of GoI’s share will be an overhang on the stock.
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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