NMDC :Raise Our Target Price, But Maintain Hold --Nirmal Bang

Raise Our Target Price, But Maintain Hold

NMDC’s new pricing mechanism based on domestic demand-supply dynamics rather than export parity would partially help it to mitigate the effect of cyclical downturn in iron ore prices. Besides this, NMDC has commissioned its uniflow railway line system in June 2012, which gives us comfort about our FY13E volume estimate of 29mt, a growth of 6.2% YoY, despite being hit by the demage to slurry pipeline in Chhattisgarh. We revise our EBITDA estimates upward by 3% and 7% for FY13E and FY14E, respectively, on the back of improvement in expected realisation and higher volume. The stock price has risen 15% since our last update (“Performance in Line; We Upgrade Stock to Hold” dated 29 May 2012) as compared to a 7% rise in the benchmark Sensex in the same period. We retain our Hold rating on NMDC with a revised target price of Rs206 (up 21% from our earlier TP), which is 7% above the CMP

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Volume growth visible after a long period of subdued growth: NMDC reported volume CAGR of 1.3% over the past five years due to disruption to iron ore despatches by Maoists and slower expansion due to delay in projects as well as regulatory hurdles. Although, we remain circumspect about NMDC’s guidance of hitting the 50mt-mark in FY16, it surely depicts strong growth on the back of commissioning of new projects. NMDC has started its uniflow railway line system in June 2012, which would augment evacuation capacity by 3mt. NMDC is also on the verge of commencing operations at Bailadila Deposit 11B mine in October 2012, which has a capacity of 7mt. We expect this unit to contribute to volume from 1QFY14. We expect a 9.1% iron ore volume CAGR over FY12-14E
Domestic iron ore prices to be partially insulated from global prices: NMDC has changed its pricing mechanism from export parity to the one based on domestic demand-supply dynamics. We believe this would be partially beneficial as NMDC would be able to mitigate the drop in global iron ore prices to some extent. We have increased our FY13E and FY14E realisation assumptions by 3% and 4%, respectively, but still our assumptions have factored in a fair amount of caution, with blended realisation seen at US$72/70/tn in FY13E/FY14E compared to US$94/85/tn in FY11/FY12, respectively. Valuation reasonable: NMDC is currently trading at P/E multiples of 10.3x and 9.6x for FY13E and FY14E, respectively, while EV/EBITDA multiples are at 5.8x and 5.3x for the same period. Post follow-on public offer in March 2010, the stock traded at average P/E and EV/EBITDA of 13.0x and 8.1x, respectively, while the current multiples are lower than 1SD below average. Although the current multiples are marginally higher than the global average, we believe the premium valuation is likely to sustain due to longer mine life. We have also revised our target multiple from 4x to 5x FY14E EV/EBITDA, in line with our metal sector coverage universe as we believe the cyclical downturn in iron ore would not materially affect the dynamics of the business.