NMDC's Q3FY18 results (Outperformer) - Available at a dividend yield of 5%

Q3FY18 result highlights- Higher prices offset volume decline

• NMDC (NMDC IN) reported expected results with EBITDA of Rs12.1bn, up 18% yoy and EBITDA/t of Rs1,501, up 47% yoy, primarily driven by higher realisation and lower other expenditure.
• Net sales, at Rs24.7bn, was down 1% yoy due to 20% yoy lower volume (8.1mt), offset by 23% yoy increase in blended iron ore realization to Rs3,014/t. Sales volume from Chhattisgarh was adversely affected for 2 months (6^th Oct- 12^th Dec 2017) due to disruption in railway line. Domestic iron ore realization ex statutory levies was up 23% yoy to Rs2,445/t.
• EBITDA, at Rs12.1bn, was up 18% yoy and EBITDA/t of Rs1,501, up 47% yoy. Higher prices and lower expenditure offset volume decline. Mining cost ex-royalty was down 5% yoy to Rs920/t which was primarily due to absence of provisions on service tax on royalty after implementation of GST. NMDC made provisions of Rs1.08bn on account of it in Q3FY17. Adjusted for the same, EBITDA/t was up 34% yoy.
• Lower other income (down 29% yoy) due to lower cash offset higher operating profits. NMDC has written back Rs1.4bn (shown as exceptional items) towards excess provisioning made earlier on account of DMF. As a result, adjusted PAT stood at Rs7.9bn, up 8% yoy.
• Net cash stood at Rs58bn at Q3FY18 as the company slows capex on upcoming 3-mtpa steel plant.

Key positives: Higher iron ore realisation

Key negatives: Lower iron ore volumes

Impact on financials: Increased FY18E earnings by 15% and FY19E by 16% to factor in higher prices; introduced FY20E

Valuation & view: Retain Outperformer with TP of Rs154

During January 2018, NMDC raised iron ore prices by Rs500/t after few miners at Odisha suspended mining operations. We expect the Odisha miners will restart mining from March 2018 and as a result, NMDC should roll back price hike of Rs500/t by April 2018, in our view. We believe that it will be difficult for NMDC to sell its 3mtpa steel plant. We value the iron ore business at 5.0x FY20E EV/EBITDA and investments in the steel plant at Rs40/sh (60% of FY20E CWIP) and arrive at a fair value of Rs154. The stock is available at the dividend yield of 5%. Reiterate Outperformer.