NMDC - A single headwind against investment thesis - II - ICICI Securities

NMDC aims to achieve YoY flat production through improved H2FY21 performance. Amendment of MMDR, on the final premium to be imposed on mines allocated (for second and subsequent renewals) and further clarity of its impact on Chhattisgarh mines is awaited. It appears from the management commentary that the outcome may take some more time. A strong EBITDA trajectory, possible valuation upside on demerger of steel plant, announced buyback at ~11% premium to current market price (CMP) - all these factors were prospective for the investment thesis of NMDC. Yet, the incident of imposition of 22.5% additional premium for renewal of Donimalai mines creates the single biggest overhang on the stock. Maintain HOLD.

- Imposition of 22.5% premium in Karnataka. The consensus clarity on a quarter old topic appears on the edge, given the discussions on the call. We feel the case clearly represents a thought-through on premium imposition on mines allocated and not auctioned (for second and subsequent renewals). There is no incremental clarity on retrospective imposition on mines renewed for second and subsequent time under the allocation route - looks unlikely though.

- NMDC aims to maintain production YoY. Despite the exceptional weather conditions in Bailadila during July, August and September, production has improved. According to the management, things are much better now and modifications have been made in the projects. By ramping-up production in H2FY21, NMDC aims to make up for the 11% shortfall in production in H1FY21. Adjustments made in Kirandul and addition of new line will augur well for production ramp up. Demand seems to be strong and there is an uptick in consumption from steel plants apart from supply shortage in the Odisha market.

- Steel operations will see no incremental equity funding from NMDC. NMDC has borrowed Rs 5.28bn through NCDs, and has further authorisation to borrow Rs50bn for the steel plant. NMDC aims to leverage steel plant at 40% of capital structure and plans to borrow Rs 20-25bn in the coming 1.5 years. Interest is being capitalised.

- Demerger of the steel plant progressing on schedule. Process has been initiated already, appointment of legal, transaction advisory and the asset valuer are already done. Work is under progress and is on schedule as of now. The demerger is expected to happen between 9-12 months from the date of initiation.

- Donimalai mining lease renewal. Mining activity is likely to commence soon as order from the State government of Karnataka is awaited. There will be an amendment to the mining act (MMDR) and more details are awaited on the same.

- On demand from RINL. OMDC (subsidiary of RINL) may start operations (4mnte) and might take some more time. Management is not much concerned about the demand from RINL as they have alternative customers and substantial demand for their iron ore.

Shares of NMDC LTD. was last trading in BSE at Rs.96.05 as compared to the previous close of Rs. 94. The total number of shares traded during the day was 1089905 in over 5903 trades.

The stock hit an intraday high of Rs. 97.05 and intraday low of 93.5. The net turnover during the day was Rs. 104712546.

Source : Equity Bulls

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