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Higher realisations but lower sales volume: NMDC’s 2QFY2011 net revenue
increased by 77% yoy to `2,460cr but was down 2.3% qoq. The company’s sales
volume declined by 8.7% yoy and 20.3% qoq to 5.1mn tonnes as volume was
impacted by a) the monsoon season and b) ban on iron sales in Karnataka. While
domestic sales volume declined by 5.3% yoy and 25.3% qoq to 4.5mn tonnes,
export sales volume declined by 22.8% yoy to 0.7mn tonnes, though higher by
43.6% qoq. Average blended realisation for the quarter increased by 101.5% yoy
and 20% qoq to US $103/tonne. For 3QFY2011E, the company has cut its iron
ore export prices by ~13% qoq, domestic lumps prices by ~5% qoq and fines
prices by ~10% qoq. On the cost front, royalty charges on iron ore increased to
`200cr in 2QFY2011 as compared to `62cr in 2QFY2010 and `139cr in
1QFY2011. Further, freight cost increased by 69.4% yoy and 50.1% qoq to
`189cr. As a result, EBITDA margin expanded by 170bp yoy to 74.8% but fell by
664bp on a sequential basis. This resulted in EBITDA growing by 81.1% yoy to
`1,840cr, down 10.3% qoq. Consequently, net profit increased by 78.8% yoy to
`1,379cr, but down 8.3% qoq.
Outlook and valuation: At the CMP, the stock is trading at 10.4x FY2011E and
7.6x FY2012E EV/EBITDA and 5.6x FY2011E and 4.2x FY2012E P/BV,
respectively. In our view, NMDC’s volume growth remains at risk in light of the
ban on iron ore in Karnataka and Naxals activity in its mining region.
We recommend Reduce on the stock with a Target Price of `244, valuing it at 7x
FY2012E EV/EBITDA.
Result highlights
Higher realisations drive top-line growth
Average blended realisation for the quarter grew by 101.5% yoy and 20% qoq to
US $103/tonne. During the quarter, the export prices of lumps increased by
136.1% yoy to US $170/tonne and prices of fines grew by 145.9% yoy to
US $150/tonne. Domestic prices of lumps grew by 70.2% yoy to `4,340/tonne
and that of fines increased by 103.2% yoy to `3,556/tonne. For 3QFY2011E,
NMDC has cut its iron ore export prices by ~13% qoq and domestic lumps prices
by ~5% qoq and fines by ~10% qoq.
On the negative side, iron ore production during the quarter declined by 16.4%
yoy and 21.6% qoq to 4.6mn tonnes. Sales volume for the quarter declined by
8.7% yoy and 20.3% qoq to 5.1mn tonnes, primarily due to a) the monsoon
season and b) ban on iron sales in Karnataka. While domestic sales volume
declined by 5.3% yoy and 25.3% qoq to 4.5mn tonnes, export sales declined by
22.8% yoy to 0.7mn tonnes, but were higher by 43.6% qoq.
Consequently, 2QFY2011 net revenue increased by 77% yoy to `2,460cr, down
2.3% qoq.
…but margin expanded by 170bp yoy
On the cost front, royalty charges on iron ore increased to `200cr in 2QFY2011
as compared to `62cr in 2QFY2010 and `139cr in 1QFY2011. Further, freight
cost increased by 69.4% yoy and 50.1% qoq to `189cr. As a result, EBITDA
margin expanded by 170bp yoy to 74.8% but fell by 664bp qoq. This resulted in
EBITDA growing by 81.1% yoy to `1,840cr, though down 10.3% qoq.
…leading to strong net profit growth
While depreciation expenses increased by 21.5% yoy to `30cr, other income grew
by 40% yoy to `246cr. Thus, net profit increased by 78.8% yoy to `1,379cr, down
8.3% qoq.
Investment rationale
Increased production to 50mn tonnes by FY2014–15E
Management plans to ramp up its production capacity to 50mn tonnes by
FY2014–15E through increased exploration of its existing mines and development
of new mines, i.e., Deposit 11B and Deposit 13 in Bailadila and Kumaraswany in
Karnataka. The targeted cost for the development of the three mines is `2,400cr.
However, in 1HFY2011, the company’s volumes have been impacted by iron ore
ban in Karnataka and Naxal activities in the Dantewada region of Chhattisgarh.
Positioned at the lower end of the cost curve
NMDC's operating cost (excluding freight) of US $7.2/tonne is at the lower end of
the global iron ore cost curve. The company enjoys the benefit of low costs on
account of the close proximity of its mines to ports and railways. Considering the
additional capacity coming on stream, management also plans to invest `3,500cr
in building a 10mn tonne slurry pipeline from Bacheli to the Vizag port, which
would help it maintain margins.
Seeking to diversify into steel making and acquire mines abroad
Management intends to diversify its operations by moving downstream through the
establishment of steel plants and pellet plants. Accordingly, the company has lined
up capex of `26,500cr for the next five years. Of the total amount, management
plans to invest `15,500cr in setting up an integrated steel plant, while `1,400cr
would be incurred towards setting up two pellet plants. Moreover, majority of the
cash outflow will start from FY2013E. In addition, management has indicated its
plans to acquire mines in Australia, Brazil and South Africa.
Outlook and valuation
At the CMP, the stock is trading at 10.4x FY2011E and 7.6x FY2012E EV/EBITDA
and 5.6x FY2011E and 4.2x FY2012E P/BV, respectively. In our view, NMDC’s
volume growth remains at risk in light of the ban on iron ore in Karnataka and
Naxals activity in its mining region. We recommend Reduce on the stock with a
Target Price of `244, valuing it at 7x FY2012E EV/EBITDA.
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