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NMDC (3-UNDERWEIGHT; PT RS202; +7%): UP-MARKET VALUATION
The Indian iron ore mining impasse has resulted in speedy approvals for NMDC, as it has
stood out as “the ethical miner”. However, considering ground realities, we expect
volume benefits to be only gradual. While proposed investments in international mining
assets should be ROE accretive; clarity on investment and the time line have not been
ascertained. We expect investment in steel assets to face execution challenges and
return to be back-ended. The current form of the mining bill could shave off about 8.3%
from our EPS forecasts. We initiate coverage with a 3-Underweight rating and
DCF-based price target of Rs202, suggesting 7% potential upside.
Volume growth benefits to be gradual; regulatory proposals to remain an overhang:
Additional mining approval in Karnataka would aid medium-term volume growth. However,
considering logistics challenges, we expect volume ramp-up at Karnataka to be gradual. We
also remain cautious on NMDC’s targeted volume growth guidance of 50mn tonnes by
FY15. The draft mining bill, recently approved by the Cabinet, recommends a mining tax
equal to the royalty for non-coal companies, has not been approved by the parliament. If
imposed, the impact to EPS would be about 8.3% on our estimates. The Steel Ministry is
demanding an export tax hike to 30% (20% currently). A further hike in export duties is a
scenario we would not rule out.
Steel plants: right move but execution a key risk: NMDC will spend about Rs160bn for its
proposed steel plants in Chhattisgarh (3mn tonnes) and Karnataka (2mn tonnes) in FY12
and FY13, respectively. While complete backward integration substantially enhances the
financial viability of the project, we believe execution is a key monitorable. Furthermore, we
believe investors are unlikely to assign any value to these projects until visibility emerges on
execution. We have not assigned any value to the CWIP for the steel project.
International acquisitions to watch out for: NMDC has been eyeing multiple acquisition
opportunities for international iron ore and coal assets. Effective utilization of cash
resources (Rs207 on 1H FY12) would be a potential catalyst enhancing return ratios as
compared to ROE-dilutive cash reserves. However, the quantum of investments and related
timelines are not yet known.
Initiate with 3-Underweight rating and Rs202 PT: Export taxes in India, subsidises costs for
the steel industry at the expense of miners, we argue. Although NMDC boasts world-class
mining assets with mine life in excess of 30 years, current valuations of 4.2x FY13E
EV/EBITDA are in-line with global mining peers. We initiate coverage with a 3-Underweight
rating and a DCF-based price target of Rs202.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NMDC (3-UNDERWEIGHT; PT RS202; +7%): UP-MARKET VALUATION
The Indian iron ore mining impasse has resulted in speedy approvals for NMDC, as it has
stood out as “the ethical miner”. However, considering ground realities, we expect
volume benefits to be only gradual. While proposed investments in international mining
assets should be ROE accretive; clarity on investment and the time line have not been
ascertained. We expect investment in steel assets to face execution challenges and
return to be back-ended. The current form of the mining bill could shave off about 8.3%
from our EPS forecasts. We initiate coverage with a 3-Underweight rating and
DCF-based price target of Rs202, suggesting 7% potential upside.
Volume growth benefits to be gradual; regulatory proposals to remain an overhang:
Additional mining approval in Karnataka would aid medium-term volume growth. However,
considering logistics challenges, we expect volume ramp-up at Karnataka to be gradual. We
also remain cautious on NMDC’s targeted volume growth guidance of 50mn tonnes by
FY15. The draft mining bill, recently approved by the Cabinet, recommends a mining tax
equal to the royalty for non-coal companies, has not been approved by the parliament. If
imposed, the impact to EPS would be about 8.3% on our estimates. The Steel Ministry is
demanding an export tax hike to 30% (20% currently). A further hike in export duties is a
scenario we would not rule out.
Steel plants: right move but execution a key risk: NMDC will spend about Rs160bn for its
proposed steel plants in Chhattisgarh (3mn tonnes) and Karnataka (2mn tonnes) in FY12
and FY13, respectively. While complete backward integration substantially enhances the
financial viability of the project, we believe execution is a key monitorable. Furthermore, we
believe investors are unlikely to assign any value to these projects until visibility emerges on
execution. We have not assigned any value to the CWIP for the steel project.
International acquisitions to watch out for: NMDC has been eyeing multiple acquisition
opportunities for international iron ore and coal assets. Effective utilization of cash
resources (Rs207 on 1H FY12) would be a potential catalyst enhancing return ratios as
compared to ROE-dilutive cash reserves. However, the quantum of investments and related
timelines are not yet known.
Initiate with 3-Underweight rating and Rs202 PT: Export taxes in India, subsidises costs for
the steel industry at the expense of miners, we argue. Although NMDC boasts world-class
mining assets with mine life in excess of 30 years, current valuations of 4.2x FY13E
EV/EBITDA are in-line with global mining peers. We initiate coverage with a 3-Underweight
rating and a DCF-based price target of Rs202.
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