NMDC's Q4FY19 results (Outperformer) - Favorable macro & cheap valuation

Q4FY19 result highlights- Good show amid volume loss of Donimalai

Lower than expected costs led to a beat of 13% to our EBITDA estimates.

• Despite no volume from Donimalai mine and lower iron ore prices, NMDC reported adj EBITDA of Rs19.6bn, down 9% yoy (adj EBITDA/t of Rs1,926, down 6% yoy) due to lower iron ore prices (down 3.4% yoy to Rs3,528/t).
• Reported EBITDA of Rs 20.9bn includes one off reversal of Rs1.65bn excess royalty paid in earlier years (starts computing on sales volume now for all mining units v/s computing royalty on production volume in one of the units) and Rs310m provision of interest on service tax on royalty which is contested.
• During the quarter, average domestic lumps prices (ex-royalty) were down Rs707/Rs178 qoq/yoy to Rs3,185/t and fines prices (ex-royalty) were down by Rs520/Rs173 qoq/yoy to Rs2,632/t. As a result, average domestic iron ore realisation (ex-royalty) was down by Rs571/Rs186 qoq/yoy to Rs2,827/t.
• Sales volumes at 10.2mt were down 3.5% yoy despite non operation of Donimalai mine during Q4FY19 as volumes from Kumaraswamy mine increased by 62% yoy to 2.8mt reaching 100% of capacity in FY19.

Key positives: Cost under control, price hike of Rs250/t w.e.f. 25^th May

Key negatives: Lower iron ore prices, volume

Impact on financials: Increase FY20E EBITDA by 3% to factor in higher prices.

Valuation & view: Retain Outperformer with revised TP of Rs168

NMDC’s current iron ore prices are ~Rs260/t higher than Q4FY19 average. We expect domestic iron ore prices to remain firm and accordingly increased NMDC’s average blended realisation by ~Rs160/t in FY20E to factor in high domestic prices and higher export realisation (US$85/t, earlier US$75/t). We expect Karnataka High Court to rule in favour of NMDC (on issue of Donimalai mine) in June 2019, allaying fears of future mining operations of NMDC. However, we have cut FY20E volumes by 1.2mt to factor in volume loss from Donimalai in Q1FY20. We expect company’s 3-mtpa steel plant to be commissioned by FY20-end. Our revised target price stands at Rs168/sh (earlier Rs160/sh), valuing the iron ore business at 5.5x FY20E EV/EBITDA (Rs141/sh) and investments in the steel plant at Rs27/sh (50% of FY20E CWIP). At CMP, it is trading cheaply at 3.9x FY20E EV/EBITDA.