NMDC :: Centrum

Volume traction continues, better pricing ahead; maintain Buy
We maintain Buy on NMDC notwithstanding marginally lower than expected Q2
results as we i) see volume traction continuing and revise our volume estimates higher
to 29.5/31MT for FY14E/5E, ii) believe pricing has bottomed out and expect further
uptick in fines prices in Q4 and iii) increase our EBITDA estimates by 1.6%/4.4% for
FY14E/15E even after factoring in higher expenses on exports. Improvement in
outlook for domestic iron ore pricing on the back of strong Chinese demand and weak
rupee cements our positive stance. Undemanding valuations and strong dividend
yield is an added plus. Reiterate Buy with an upward revised target price of Rs165.

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-->  Volumes continue to show traction; Karnataka volumes surprise positively:
Volumes at 6.5MT (up 10% YoY) continues to show traction and Karnataka volumes
for H1 stood at 4.4MT (up~13% YoY). Capacity reduction fears in Karnataka by CEC
could be limited as management has pointed to an increase in reserves to 110 MT
(JORC approval awaited) at Donimalai post further drilling. Export sales were higher at
0.7MT and kept margins subdued at 60.2% (vs exp. 60.8%) due to higher freight and
other expenses.
 Pricing has bottomed out, expect fines pricing to move up further: Pricing for
domestic iron ore has seen a pick up from lower levels from Sep’13 (post hikes by
Orissa miners) and NMDC has taken Rs100/t price increase from Oct’13. We expect
fines pricing to move up further in the range of Rs50-100/t by Q4 for NMDC on the
back of better demand in H2 coupled with increase in domestic sponge iron/pellet
prices. Global iron ore pricing has also remained firm on the back of strong Chinese
demand and the weak rupee has helped support domestic export pricing parity.
 Earnings revised upwards on higher volumes, better pricing: We are positively
surprised by the volume trajectory in H1FY14 (particularly strong volumes in
Karnataka e-auctions albeit at lower pricing). We revise our overall volume estimates
to 29.5/31MT for FY14E/15E from 29/30MT earlier as we increase our volume
estimates from Karnataka by 0.5/1MT respectively. Along with better volumes, we
also factor in marginally higher pricing and higher expenses (on exports) and thus
raise our EBITDA estimates by 1.6%/4.4%% for FY14E/15E.
 Valuation and risks – maintain Buy: We remain structurally positive on the
company on account of low cost operations, strong free cash flow generation and
healthy balance sheet. Despite a sharp up move in recent past, the stock trades at
undemanding valuations of 4.5x FY15E EV/EBITDA. Strong dividend yield is an
added plus with interim dividend of Rs3/share announced. We increase our target
valuation multiple to 5.5x (from 5x, in line with increase in global peer average) and
value the stock at Sep15E EV/EBITDA to arrive at a fair value of Rs165. Maintain Buy.
Risks to our call include lower volumes in H2FY14, lower prices and unfavourable
use of the cash pile