NMDC -Strong fundamentals :: Macquarie Research,

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NMDC
Strong fundamentals
Event
 1QFY12 results better than expected: NMDC reported its 1Q results which
were ahead of our estimates on higher volume and lower costs. We believe
that taxation on iron ore has peaked and strong iron ore pricing will keep the
earnings outlook more sustainable. Maintain Outperform.
Impact
 1QFY12 strong earnings: NMDC reported net sales at Rs27.8bn, up 10.5%
YoY with volume growth of 7% YoY and realisation of 3%YoY. EBITDA at
Rs22.6bn saw an increase of 10%, as the company recorded of $15/t of
costs, as lower export volume reduced selling expenses and export duty. PAT
at Rs18bn is up 20%. The company has reported realisation of $88/t and
EBITDA at $71/t.
 Pricing remains strong despite 15% cut in fines pricing for the quarter:
NMDC had announced a cut in its fines pricing for 1QFY12, despite this, it has
delivered a blended price of $88/t, 4% above last year. As the uncertainty in
Karnataka continues, we believe that pricing will remain high and NMDC
should benefit.
 Volume growth remains on track: NMDC has guided to 32mt of iron ore
sales and 30mt of production for FY12 and sold 22% of this during 1Q. The
company is looking to decrease its inventory during the year and is also
bringing Deposit 11B online, which will contribute to sales volume next year.
We expect NMDC to grow its iron ore production by 100% in the next 5 years
 Royalty sharing on CSR –although watered down, it remains a risk: The
new draft of the mining bill talks about 100% royalty sharing for traditional land
owners. Though still in the draft stage, this directly affects NMDC and we think
could erase 10% of its FY12 earnings; thus, it is a key overhang on the stock.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs289.00 based on a Sum of Parts methodology.
 Catalyst: Continues strength in iron ore pricing and increase in despatches
Action and recommendation
 Maintain Outperform: NMDC is sitting on very high quality iron ore
resources, with a very low cost of production. It is expected to increase
volume by 100% over the next five years, and has all approvals in place. With
profits now more normalised, and valuations very reasonable (15% below its
FPO price), we recommend buying on dips.