Recovery in volumes and price a positive
Maintain Buy on attractive valuation
NMDC has cumulatively raised iron ore prices by INR400/t over Jul–Aug on improving volumes (up 7% YoY in Jul’20), ahead of our expectations. Rising capacity utilization by steel players and higher steel prices bode well for NMDC and should support higher volumes and prices; we raise our EPS estimate by 12%/5% for FY21/FY22. We also find the valuation attractive as CMP of INR85/sh implies nil value for the 3mtpa Nagarnar steel plant (INR55/sh book value) and a 6.5% dividend yield. Reiterate Buy.
Improving iron ore demand leads to consecutive price hikes: In Jul’20, NMDC’s volumes increased 7% YoY to 2.57mt on improving demand from steel plants as domestic demand improves. This, coupled with higher international iron ore prices, has enabled NMDC to raise prices this month by INR200/t (~9%) to INR2,360/2,650 per ton for fines/lumps. This price increase follows NMDC’s price hike of INR200/t in Jul’20.
Expect prices to sustain in 2HFY21: We believe NMDC’s iron ore prices should sustain in 2HFY21 due to rising steel prices (up ~INR2,000/t MoM), higher pellet prices (up 20% MoM to INR7,200/t), and reduced iron ore supply from Odisha mines. Therefore, we have raised our expectation of prices by 2% each in FY21 and FY22. We further note that our FY22 domestic price assumption is still 11% lower than FY20 average prices.
FY21 volumes to decline 5% YoY to 30mt: Volume growth of 7% YoY reported by NMDC (to 2.57mt) in July’20 has surprised and is three months ahead of our expectation of positive volume print in 2HFY21. While iron ore production from several auctioned mines in Odisha has commenced in the current quarter, we believe production from these mines would be lower by >30% YoY in FY21, supporting NMDC’s volumes in the near term. Thus, we have raised our FY21 volume estimate by 5.0% to 30mt (Chhattisgarh – 23.7mt, down ~3% YoY; Karnataka – 6.3mt, down ~11% YoY). Our FY21 volume expectation of 30mt (-5% YoY) implies 3% YoY growth for the rest of FY21, against 19% YoY decline (to 9.0mt) over Apr–Jul’20. We expect volumes to rise 5% YoY to 31.5mt in FY22E.
Valuation and view: We expect NMDC’s EBITDA to decline at a 13% CAGR to INR47.2b over FY20–22E, weighed by likely flat volumes and 14% lower blended iron ore realization during this period. The company, however, has a few optionalities that are not being priced-in currently: (1) any favorable decision on the Donimalai mine in Karnataka would increase volumes by ~20% and (2) the planned divestment of the 3mtpa Nagarnar steel plant would unlock value (~INR55/sh book value). Also, the stock provides dividend yield of ~6.5% at current prices. We value the stock at INR120/share on an SOTP basis – 5x FY22E EV/EBITDA for its core iron ore mining business and 50% of the book value for the Nagarnar plant. Reiterate Buy.
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