NMDC- Earnings beat (adjusted for one-time item); Large dividend increase with implied yield at 6% - Remain OW :: JPMorgan

NMDC delivered very strong numbers, with revenues 15% higher than our
estimates. Adjusted for the one-time payment of Rs3.2bn (related to SC
judgment), EBITDA stood at Rs20.7bn vs. JPMe at Rs18bn. The big positive, in
our view, was the dividend increase, with FY13 DPS at Rs7 and a 6% yield at
CMP. With NMDC's strong cash balance (net cash at Rs210bn), strong operating
cash flow and limited capex, we expect DPS to increase. Media reports (steelmint)
indicated that NMDC kept prices unchanged for Jun-13. These factors should
drive the stock up and reverse the large underperformance seen YTD, in our view.

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 Higher ASPs drive EBITDA (adj.) beat: NMDC reported 4Q EBITDA
(adjusted by Rs3.2bn for three quarters’ contribution toward SPV and
compensation payment) of Rs20.7bn, ahead our estimates Rs18.2bn, driven by
higher-than-expected ASPs. While sales volume of 8.2mt (+55% q/q; +28%
y/y) was in line, ASPs improved to Rs3843/mt (+1% q/q vs. our expectation of
a decline) despite the price cut in lumps, driven by better sales mix, in our view.
We believe employee cost was 16% higher q/q due to provisions. Adj.
EBITDA/mt was Rs2500/mt vs. JPMe at Rs2200/mt. Other income declined 2%
q/q. Reported PAT came in at Rs14.7bn, below JPMe and consensus due to the
one-time item and lower other income.
 With a 2.8x FY15E EV/EBITDA, 6.1x P/E and 6% dividend yield, what is
worrying investors? NMDC is down 20% since the stake sale vs. the broader
markets up ~5%. In our view, investors are concerned about a loss of volume
from Karnataka on a potential reduction of approved capacity and large declines
in ASPs across fines and lumps. In our view, NMDC is unlikely to see any loss
in Karnataka, at least in FY14-15E, as the ramp-up of Category A and B mines
would likely take time. We also do not see any large downside in iron ore fines
from current levels. The company announced a final dividend of Rs4/share,
taking the total FY13 dividend to Rs7/share (above our and Street estimates).
The implied payout of 43% vs. 25% in FY12 is a key positive (dividend yield
~6% at CMP).
 Cut EPS and PT on lower Other Income, lower fines and lumps ASP/T: We
roll forward our PT timeframe to Mar-14 based on FY15E earnings. We
maintain our target EV/EBITDA multiple at 5x. We cut FY14-15E EPS by 5-
7% on lower Other Income, as the lower interest rates in the system have an
impact on the company’s interest income (Other Income is ~25% of PBT), and
marginally lower iron ore ASP/T. Our revised PT of Rs170 implies potential
upside of ~45% from current levels.