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Analyst Corner | Maintain ‘Hold/SP’ on NMDC with target price of Rs 100

Edelweiss

The monthly sales volume of NMDC topped 3.5 MT for the first time in FY19, buoyed by both the Chhattisgarh and Karnataka segments. The key highlights are as follows: 1) Sales volume jumped 17% y-o-y to 3.6 MT. 2) Production volume edged down 3% y-o-y to 3.3MT due to the ongoing production halt at Donimalai. 3) Offtake by KIOCL and RINL picked up while that by JSW Steel declined. We expect that: 1) The production uptick at Chhattisgarh to partially make up for the volumes loss at Donimalai; and 2) our FY19E volume of 30.6 MT to be achieved. However, we believe the production halt at Donimalai and the uncertainty with respect to commissioning of the steel plant will continue to overhang the stock. Maintain HOLD/SP with a target price of INR100, implying an exit multiple of 5.5x June 2020E Ebitda.

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Dispatches in February jumped 17% y-o-y (14% MoM) to 3.6 MT led by an improved performance at both the Chhattisgarh and Karnataka segments. 1) Chhattisgarh-based units procured 69 rakes (up 73% y-o-y, 109% MoM) from NMDC s Bailadila mine. 2) Destocking is evident in Karnataka as sales volume spiked 34% y-o-y to 1.3 MT despite production declining 35% y-o-y to 0.6 MT. 3) Procurement by JSW Steel-Dolvi slid 27% y-o-y to 45 rakes while that of KIOCL rose 18% y-o-y to 39 rakes. 4) Exports dipped 28% y-o-y to 39 rakes. We believe the production ramp-up in the Chhattisgarh segment would partially offset the loss in Karnataka and our FY19E volume would be achieved.

We perceive production halt at Donimalai as a major overhang. After hearing both the parties, the Karnataka high court has reserved its judgment. However, we expect the aggrieved party to appeal against the decision in the Supreme Court, which might delay the resumption of operations at the mine. While we are upbeat on visible volume uptick at NMDC, the ongoing halt at Donimalai keeps us on guard as it is likely to keep the stock performance muted. Maintain HOLD/SP with a target price of INR100. The stock is trading at 6.0x FY21E Ebitda.

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NMDC is an India-based firm engaged in mining of iron ore. The company’s segments include iron ore, and other minerals & services. It is also engaged in the production and sale of diamond, sponge iron and wind power. Its projects under construction include Bailadila Deposit-11/B, Kumaraswamy iron ore project, 1.2 million tonne per annum (MTPA) pellet plant at Donimalai, 3 MTPA integrated steel plant in Chhattisgarh, Panthal magnesite project, screening plant III at Kirandul Complex, screening plant II at Donimalai complex, doubling of railway line between Kirandul and Jagdalpur, steel plant at Bellary and rail link between Dalli-Rajhara-Rowghat- Jagdalpur railway line project. It proposes to diversify into other commodities, such as steel making raw materials (coking coal, manganese ore nickel); fertiliser raw materials (rock phosphate potash), and thermal coal. It also proposes to invest in raw materials, such as tungsten and rare earth minerals.