Volumes recover smartly, maintain buy NMDC ::Centrum

Volumes recover smartly, maintain buy
NMDC’s operational performance (adjusted for ~Rs4bn provisioning) was marginally below our expectations with adj. EBITDA at Rs21.5bn (margin of 67.3%) as sales volume stood at 8.2 MT (in line) but with higher export share of ~11%. NMDC made ~Rs4bn provision for e-auction sales in Karnataka done during last 18 months and fines imposed by CEC and the Supreme Court. The company announced final dividend of Rs4/share (total Rs7/share for FY13, div. yield of ~6%) and kept pricing unchanged for June. We see volume growth coming back in FY14E and expect sales volumes of 29MT/31MT in FY14E/15E. We reduce our EBITDA estimates for FY14E/15E to account for higher expenses in Karnataka and lower realizations. Maintain Buy with a reduced target price of Rs170.
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Volumes recover; realizations stay flat QoQ as export volumes share increases: Sales volumes stood at ~8.2MT, up by ~29% YoY and ~55% QoQ as production and evacuation constraints eased post monsoons, in Q2& Q3FY13. Export volumes stood at ~).9MT (~11% share). Realizations stayed flat QoQ at ~Rs3886/tonne, supported by exports.
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Provisioning done for sales in Karnataka through auctions: NMDC took a provision of ~Rs3.4bn in Q4 towards 10% contribution of revenue generated from e-auction (since Q3FY12) with regards to CEC recommendation and ratification of the same by the Supreme Court recently. Penalty of ~Rs0.7bn was also expensed. We expect Rs2.5bn expense for 10% revenue share on 8MT volume sales in Karnataka in FY14E
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Adj. EBITDA margin lower than expected on higher exports: Adjusted for provisions, EBITDA margin stood flat QoQ at 67.3% and EBITDA stood at ~Rs21.4bn (EBITDA/tonne of ~Rs2613, flat QoQ). Margin was lower than our expectation of 72.1% on account of larger share of exports in the sales mix which led to increase in freight and export duty costs.

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Outlook – Volumes to improve in FY14E, pricing to stabilise: After a tough year on the logistics front we see better volume performance from NMDC in FY14E on account of i) various logistical improvements already undertaken in FY13 in Chhattisgarh (uniflow loop line of 3MT and weigh motion bridge), ii) commencement of forward e-auction in Karnataka and iii) rationalisation of prices (particularly lumps) in accordance with domestic market conditions. Pricing has been maintained flat for the last two months (May and June) and domestic demand supply situation remains in NMDC’s favour, in our view. Current prices stand at Rs2610/tonne for fines and Rs4600/tonne for lumps. The company’s capex on mining expansions and the setting up of steel and pellet plants in Karnataka continue albeit at a slow pace and capex guidance stands at Rs27bn for FY14E. We cut our FY13E/FY14E realization estimates by 4.4%/5.2% and keep our fines/lumps price assumptions at Rs2600/Rs4500/tonne for FY14E, which we believe have little to no downside risk. We cut our EBITDA estimates by 14.4%/14.6% for FY13E/14E on account of expense on Karnataka sales and higher expenses on export sales.
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Maintain Buy with a reduced target price: We reduce our estimates and target price on the stock but remain structurally positive on the company as we see volume growth ahead along with stable to positive pricing. We value the company at 6x FY15E EV/EBITDA to arrive at a target price of Rs170. Maintain Buy.