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Favorable Donimalai judgment to remove major overhang
We await confirmation/more details on HC announcement
According to SteelMint, the Karnataka High Court (HC) has announced the final judgment for the Donimalai mine (capacity: 7mt) in favor of NMDC. We note that the Karnataka government in Nov’18 had renewed the lease on the company’s Donimalai mine for 20 years on condition of an 80% revenue share. However, according to the MMDR Act, NMDC (govt. owned) is allowed an automatic renewal for its mines without any revenue sharing. As a result, the company had decided to shut down its Donimalai mine and contest the Karnataka government’s terms of lease renewal. The favorable HC judgment would pave the way for NMDC to operate the mine without paying any premium.
* Judgment could lead to upside to our FY21 estimates
With the restart of the Donimalai mine, iron sales volumes are likely to increase to ~38mt in FY21 (v/s current estimate of 35mt). This would lead to ~9% upside to our FY21 EBITDA/PAT estimates. We, however, do not bake this in our estimates as details on the judgment are still awaited. Besides, the Karnataka government may contest the verdict in Supreme Court, leading to possible delays in the restart of the mine.
* Valuations attractive; lease renewal would remove major overhang
We see the favorable judgment as directionally positive, removing a key overhang on the stock. Moreover, the expected completion of the company’s 3mt steel plant and the possible domestic supply disruption upon the expiry of merchant mines (resulting in higher domestic prices) could provide further levers. We maintain our Buy rating on NMDC and value the stock at INR138/share based on 4x EV/EBITDA on FY20E basis.
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