NMDC – 3QFY2011 Result Update -Angel Broking

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NMDC – 3QFY2011 Result Update

Angel Broking recommends a Neutral on NMDC.

For 3QFY2011, NMDC reported revenue growth of 65.2% yoy to `2,622cr,
mainly on account of high realisation of iron ore. The company’s EBITDA
increased by 84.4% yoy to `2,275cr, while EBITDA margin expanded by massive
904bp yoy in 3QFY2011 on account of a steep rise in iron ore prices, which
outpaced the increase in costs significantly.

Higher realisations yoy: Net sales increased by 65.2% yoy to `2,622cr mainly on
account of high realisation of iron ore during 3QFY2011. The company’s EBITDA
increased by 84.4% yoy to `2,275cr, while EBITDA margin expanded by 904bp
yoy to 86.8%. The improvement in margin was mainly on account of a steep rise
in iron ore prices, which outpaced the increase in costs. Other income grew by
39.3% yoy to `295cr in 3QFY2011. Consequently, net profit increased by 81.5%
yoy to `1,519cr in 3QFY2011.


Outlook and valuation: NMDC reported strong profitability growth in 3QFY2011
due to a steep rise in iron ore sales realisations. Prices of iron ore have risen
steeply in the past 3–6 months. With rising steel capacity, coupled with supply cuts
in India, we expect domestic iron ore prices to remain firm in FY2012. Hence, we
have raised our iron ore price estimates for FY2012. At the CMP, the stock is
trading at 10.4x FY2011E and 7.3x FY2012E EV/EBITDA and 5.5x FY2011E and
4.1x FY2012E P/BV, respectively. Valuing the stock at 7.0x FY2012E EV/EBITDA,
we recommend a Neutral rating on the stock (from Reduce earlier).

Investment rationale

Increased production to 50mn tonnes by FY2014–15E

Management aims 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 9MFY2011, 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 of US $20/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, on December 10,

2010, the company announced that it has signed a joint venture (JV) with OJSC

Severstal (a vertically integrated steel maker from Russia) to build an integrated

2mn tonne steel plant in Karnataka. This JV will have captive coking coal mine in

Russia, while it will have an iron ore mining subsidiary in India. In addition,

management has indicated its plans to acquire mines in Australia, Brazil and

South Africa.

Outlook and valuation

NMDC reported strong profitability growth in 3QFY2011 on the back of a steep

rise in iron ore sales realisations. Prices of iron ore have risen steeply in the past 3–

6 months. With rising steel capacity, coupled with supply cuts in India, we expect

domestic iron ore prices to remain firm in FY2012. Hence, we have raised our iron

ore price estimates for FY2012. However, lumpiness in international iron ore

demand, challenges in increasing production and threat of the Indian government

raising export duty on iron ore fines are the key concerns for NMDC in the near-tomedium

term.

At the CMP, the stock is trading at 10.4x FY2011E and 7.3x FY2012E EV/EBITDA

and 5.5x FY2011E and 4.1x FY2012E P/BV, respectively. Valuing the stock at 7.0x

FY2012E EV/EBITDA, we recommend a Neutral rating on the stock (from Reduce

earlier).

However, the downside risk to our estimates exists in case the government increases

export tax on iron ore fines to 20% from the current 5%.