Buy NMDC - Earnings / Rating Change - Centrum

Target Price: Rs241
CMP: Rs185
Upside: 30.2%

Strongly placed and attractively valued

We spoke with the management of NMDC and discussed issues related to e-auctions, volume growth, realizations and strategy going ahead on using the huge cash pile. There has been some changes in the e-auction mechanism in Karnataka but it is running smoothly now and NMDC has sold a total of ~0.9 MT ore till now. Overall volume growth is expected to be ~10% in FY12E/13E. Realizations remain flat to stable in the domestic market despite spot price volatility globally. The cash pile is expected to be used for resource acquisition and development and setting up of a steel plant in Chhattisgarh in the next few years. We maintain our volume estimates of 30.5MT/33 MT in FY12E/13E and also our target price of Rs 241. Upgrade to Buy.

- Volume growth sustenance likely as e-auction to be a temporary phenomenon: NMDC indicated that after some changes in e-auction mechanism over the last few months, things have now started to stabilize and it has been able to sell ~0.9 MT of ore through e-auction till now (5.2 lakh tonne from Donimalai and 3.6 lakh tonne from Kumaraswamy). The company indicated that restarting of normal production and sales from legal mines in Karnataka (including NMDC's) could happen within next few months it can achieve ~8 mtpa of sales from Karnataka post that. We believe that by end of FY12E NMDC will resume direct long term contract sales in Karnataka and expect ~7 MT of sales in FY13E from Karnataka. We maintain our volume estimates of 30.5 MT/33 MT in FY12E/FY13E for NMDC.

- Realizations remain flat to stable: Blended iron ore realizations have remained flat in the domestic market. This is despite a drop in spot prices as prices remain benchmarked to global contract prices which have a lag effect and rupee depreciation has also mitigated the fall in rupee terms to some extent. We expect realizations to remain muted going forward and have factored in global iron ore contract prices of US$150/tonne and US$135/tonne in FY12E and FY13E respectively for deriving the export parity domestic price.

- Targeting global partnerships for resource acquisition and development: NMDC has recently bought a 50% stake in Legacy iron ore for ~Rs920mn and is targeting more assets through partnerships and JVs with other steelmakers globally in buying and developing assets to use its huge cash pile of ~Rs200bn and achieve the desired value addition. We see this step as a big positive from a long term strategic point of view of generating better returns on the existing and always growing cash pile.

- Valuations: Stock has seen sharp correction recently in the wake of a drop in iron ore prices globally and at the CMP of Rs185, it trades at 8.8x FY13E EPS of Rs21.1. On EV/EBITDA basis it trades at 4.4x FY13E EV/EBITDA. We value the stock at 6.5xSep'13E EV/EBITDA. We maintain our target price of Rs241 and upgrade our rating to Buy from Hold.

Source : Equity Bulls

Keywords