Robust operational show; maintain buy -NMDC :: Centrum

Robust operational show; maintain buy
NMDC’s operational performance was above expectations in Q1FY13 with
EBITDA at Rs23bn (margin of 81%) as sales volume recovered QoQ and
remained stable YoY at ~6.9MT. Volume loss of ~1.7MT YoY from Essar’s
slurry pipeline was made up through sales from other means and higher sales
volume from Karnataka (~1.8MT, up YoY by ~30%). NMDC had hiked iron ore
prices for the quarter and blended realizations stood at ~Rs4140/tonne (up by
2.2% QoQ). NMDC is getting the benefit of the shift in its pricing mechanism
from export parity based to domestic demand-supply linked system. We see
stable pricing ahead due to favourable demand supply situation in domestic
market and also expect higher volume growth going ahead on expansion and
better logistics. We maintain our volume estimates and reiterate buy with a
target price of Rs227.
Volumes improve; pricing power becomes visible: Sales volumes stood at
~6.9MT, up ~7% QoQ and almost flat YoY as Karnataka sales volumes remained
stable sequentially at ~1.8MT and loss of volumes from Essar’s slurry pipeline (~1.7
MT in Q1FY12) were made up through sales to other customers and through other
means. Realizations remained strong at ~Rs4140/tonne as NMDC announced price
hikes and greater pricing power was seen for NMDC post the shift from export
parity based pricing to domestic demand supply linked pricing mechanism.
EBITDA margin improvement more than expected: EBITDA margin improved
smartly during the quarter and EBITDA stood at ~Rs23bn (margin at 81% and
EBITDA/tonne of Rs3358, up by ~9% QoQ) as realizations were higher due to price
hikes and costs were lower on operational improvements.

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Outlook - Pricing to remain strong; volume growth remains key trigger: NMDC
is getting the benefit of the change in its pricing mechanism with greater pricing
power in the domestic market. We expect domestic iron ore prices to remain stable
due to favourable demand supply situation which would result in lower price
volatility for NMDC. NMDC revised prices upwards by ~8% QoQ for Q1FY13 and is
looking for marginal hikes for Q2FY13. Company’s various steps in increasing
evacuation from Chhattisgarh mines (uniflow loop line system) have resulted in
better volumes (stable YoY and higher sequentially) despite non availability of
Essar pipeline. We maintain our FY13E/FY14E volume estimates and expect 30 MT
of iron ore sales in FY13E (Karnataka – 7.5MT and Chhattisgarh – 22.5MT), implying
a growth rate of ~10%. Our realization estimates for FY13E/14E also remain lower
than Q1FY13 average.
Maintain Buy on attractive valuations: We remain positive on the company as
we see volume growth ahead (in H2FY13E) with higher e-auction sales volume
from Karnataka, better evacuation from Chhattisgarh and expansion at Bailadila 11
B mines. We find the stock trading at attractive valuations with FY14E P/E of 9.2x
and FY14E EV/EBITDA of 4.9x. We value the company at 6.5x FY14E EV/EBITDA to
arrive at a target price of Rs227. Maintain Buy.