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NMDC is India's largest iron ore producer. We forecast an earnings CAGR of 22% for FY11-
14, driven by volume growth, steady pricing and low costs. Iron ore reserves and resources
of 1.3bn tonnes indicate business longevity. We initiate coverage with a Buy
recommendation and a target price of Rs298.
Aggressive volume ramp-up plans backed by massive resources
NMDC is India’s largest iron ore miner based on its annual capacity of 31Mt and is largely
focused on the growing domestic steel industry. It has ambitious plans to increase capacity
to 50Mt by FY15 and, with regulatory approvals now in place, expects to add 14Mt of
capacity by end-FY12 through commissioning of the 7Mt Deposit 11B in Chhattisgarh and
the 7Mt Kumaraswamy mine in Karnataka. We estimate that its reserves and resources of
1.36bn tonnes (proven at 978Mt at average Fe of 66%) would last for more than 30 years,
even at its planned expanded rate of output. We thus view NMDC as the best-positioned
company to benefit from the structural steel demand in India. We model production volumes
of 28Mt/35Mt/42Mt for FY12F/13F/14F, respectively.
Should benefit from robust iron ore outlook, but pricing mechanism remains complex
NMDC has moved to a quarterly contract pricing mechanism with its customers, in line with
the new global practice. However, on our estimates, the pricing of iron ore in the domestic
markets (90% of volumes) was at a 15-20% discount to international contract prices in FY11
– largely because NMDC is part of the Ministry of Steel and has given several discounts to
steel producers in the past. We assume average realisation per tonne of US$101 in FY12,
US$106 in FY13 and US$103 in FY14.
We forecast an earnings CAGR of 22% in FY11-14; Buy with a Rs298 target price
NMDC’s low cost of production at US$9/tonne (excluding royalty and freight) should ensure
EBITDA margins in excess of 75%. We forecast EPS of Rs19.9 in FY12 and Rs24.5 in FY13. We
value NMDC using a DCF approach and arrive at a target price of Rs298. Key risks include: 1)
implementation of the proposed mining bill in the current form; 2) regulatory hurdles to capacity
expansion plans; and 3) investments in unrelated areas of business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NMDC is India's largest iron ore producer. We forecast an earnings CAGR of 22% for FY11-
14, driven by volume growth, steady pricing and low costs. Iron ore reserves and resources
of 1.3bn tonnes indicate business longevity. We initiate coverage with a Buy
recommendation and a target price of Rs298.
Aggressive volume ramp-up plans backed by massive resources
NMDC is India’s largest iron ore miner based on its annual capacity of 31Mt and is largely
focused on the growing domestic steel industry. It has ambitious plans to increase capacity
to 50Mt by FY15 and, with regulatory approvals now in place, expects to add 14Mt of
capacity by end-FY12 through commissioning of the 7Mt Deposit 11B in Chhattisgarh and
the 7Mt Kumaraswamy mine in Karnataka. We estimate that its reserves and resources of
1.36bn tonnes (proven at 978Mt at average Fe of 66%) would last for more than 30 years,
even at its planned expanded rate of output. We thus view NMDC as the best-positioned
company to benefit from the structural steel demand in India. We model production volumes
of 28Mt/35Mt/42Mt for FY12F/13F/14F, respectively.
Should benefit from robust iron ore outlook, but pricing mechanism remains complex
NMDC has moved to a quarterly contract pricing mechanism with its customers, in line with
the new global practice. However, on our estimates, the pricing of iron ore in the domestic
markets (90% of volumes) was at a 15-20% discount to international contract prices in FY11
– largely because NMDC is part of the Ministry of Steel and has given several discounts to
steel producers in the past. We assume average realisation per tonne of US$101 in FY12,
US$106 in FY13 and US$103 in FY14.
We forecast an earnings CAGR of 22% in FY11-14; Buy with a Rs298 target price
NMDC’s low cost of production at US$9/tonne (excluding royalty and freight) should ensure
EBITDA margins in excess of 75%. We forecast EPS of Rs19.9 in FY12 and Rs24.5 in FY13. We
value NMDC using a DCF approach and arrive at a target price of Rs298. Key risks include: 1)
implementation of the proposed mining bill in the current form; 2) regulatory hurdles to capacity
expansion plans; and 3) investments in unrelated areas of business.
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