After subdued production growth in the past (CAGR of -1.8% in FY08-13), we expect iron
ore production to perk up going forward on the back of impressive capacity expansion and
relatively firm domestic demand. Going forward, we anticipate production and sales will
grow at a CAGR of 5% and 6.5%, respectively, in FY13-15E. The stock has been under
pressure in the recent past on the back of the overhang surrounding the company’s
investment in the steel business and a steady drop in iron ore lumps realization. However,
we feel the present overhang is overdone. We believe that iron ore supply is getting
tighter in India, which will help NMDC in maintaining strong margins. We believe, iron ore
sales volume pick-up, inexpensive valuations turns the risk-reward trade-off favorable for
NMDC.
Pricing concerns remain but would fade eventually
NMDC’s stock price has been under pressure in the recent past on them back of concerns
over the unexpected drop in iron ore lump prices and recent weakness in global
commodity prices. We, however, believe the decrease in lump prices was in the offing as
the cost dynamics of the sponge iron industry resulted in closure of several sponge iron
units in Chhattisgarh resulting in consequent pressure on iron ore lumps demand and
prices. Moreover, the current cost dynamics were tilted towards usage of pellets instead
of lumps for domestic steel manufacturers. We, believe that concern on pricing still
persists given price difference between Odhisa players and NMDC. However we believe
that such difference would eventually fade out post M.B Shah report on illegal mining.
Capacity expansion on track to aim a gain in market share
The company has undertaken a capacity addition programme wherein it is on track to exit
FY15 with a mining capacity of 48 MT from 32 MT in FY13. The plan includes increasing the
existing capacity of Bacheli Complex in Chhattisgarh from 15 MT to 17 MT, a new mining
block in Kirandul complex, Chhattisgarh (capacity :7 MT) and a new mining block in
Kumaraswamy, Karnataka (capacity :7 MT). It has also been working on a plan to augment
its excavation capacity by increasing the rake loading capacity. NMDC is also mulling over a
dedicated slurry pipeline with its major customers that will provide further fillip to its sales
volume.
Other ventures like pellet plant in offing…
The company is also setting up a pellet plant with a capacity of 1.2 MT in Donimalai,
Karnataka. We believe pellet sales will drive incremental EBITDA for the company on the
back of optimal and captive raw material feed. The company proposes to use only 40% of
its fines produce as the raw material feed for its pellet plant and intends to use the idle
slimes lying at its mining complex in Karnataka as the remainder of raw material feed.
Valuation and Recommendation
NMDC has robust balance sheet with a healthy liquidity position (cash as of FY13 end at
210bn) . We have modelled an iron ore sales volume of 28.4 MT in FY14E and 32 MT in
FY15E. We have valued the stock at 5x FY15E EV/EBITDA thus arriving at a target price of
150 Possession of superior quality iron ore reserves, the company’s position in the lower
quartile of the iron ore cost curve & dominance in domestic market reiterate our positive
stanc
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ore production to perk up going forward on the back of impressive capacity expansion and
relatively firm domestic demand. Going forward, we anticipate production and sales will
grow at a CAGR of 5% and 6.5%, respectively, in FY13-15E. The stock has been under
pressure in the recent past on the back of the overhang surrounding the company’s
investment in the steel business and a steady drop in iron ore lumps realization. However,
we feel the present overhang is overdone. We believe that iron ore supply is getting
tighter in India, which will help NMDC in maintaining strong margins. We believe, iron ore
sales volume pick-up, inexpensive valuations turns the risk-reward trade-off favorable for
NMDC.
Pricing concerns remain but would fade eventually
NMDC’s stock price has been under pressure in the recent past on them back of concerns
over the unexpected drop in iron ore lump prices and recent weakness in global
commodity prices. We, however, believe the decrease in lump prices was in the offing as
the cost dynamics of the sponge iron industry resulted in closure of several sponge iron
units in Chhattisgarh resulting in consequent pressure on iron ore lumps demand and
prices. Moreover, the current cost dynamics were tilted towards usage of pellets instead
of lumps for domestic steel manufacturers. We, believe that concern on pricing still
persists given price difference between Odhisa players and NMDC. However we believe
that such difference would eventually fade out post M.B Shah report on illegal mining.
Capacity expansion on track to aim a gain in market share
The company has undertaken a capacity addition programme wherein it is on track to exit
FY15 with a mining capacity of 48 MT from 32 MT in FY13. The plan includes increasing the
existing capacity of Bacheli Complex in Chhattisgarh from 15 MT to 17 MT, a new mining
block in Kirandul complex, Chhattisgarh (capacity :7 MT) and a new mining block in
Kumaraswamy, Karnataka (capacity :7 MT). It has also been working on a plan to augment
its excavation capacity by increasing the rake loading capacity. NMDC is also mulling over a
dedicated slurry pipeline with its major customers that will provide further fillip to its sales
volume.
Other ventures like pellet plant in offing…
The company is also setting up a pellet plant with a capacity of 1.2 MT in Donimalai,
Karnataka. We believe pellet sales will drive incremental EBITDA for the company on the
back of optimal and captive raw material feed. The company proposes to use only 40% of
its fines produce as the raw material feed for its pellet plant and intends to use the idle
slimes lying at its mining complex in Karnataka as the remainder of raw material feed.
Valuation and Recommendation
NMDC has robust balance sheet with a healthy liquidity position (cash as of FY13 end at
210bn) . We have modelled an iron ore sales volume of 28.4 MT in FY14E and 32 MT in
FY15E. We have valued the stock at 5x FY15E EV/EBITDA thus arriving at a target price of
150 Possession of superior quality iron ore reserves, the company’s position in the lower
quartile of the iron ore cost curve & dominance in domestic market reiterate our positive
stanc
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