Demerger of steel plant can allow value unlocking
NMDC Q1FY21 EBITDA/te surprised on the back of better cost control, despite volumes declining 29% YoY to 6.28mnte. NMDC board has accorded in-principle approval to demerge the steel unit in a ‘time bound manner’. This can unlock significant value for the minority investors as hardly any value gets attributed to Rs 160bn of WIP in NMDC’s balance sheet on account of the steel plant. Series of price hikes (~Rs 700/te post Q1FY21) rebasing expected EBITDA/te, possible resolution of Karnataka mining remain additional tailwinds. Maintain BUY. Conference call: Friday, 28th August at 15:30 IST; 022-6280-1144, 022-7115-8045
* Demerger of steel plant can lead to value unlocking. The in-principle approval by the board of NMDC to demerge the steel plant, i.e creating a separate listed company eventually with a shareholding akin to NMDC will be value accretive to the minority shareholders. If pursued in a time bound manner, this can lead to i) separate avenues of fund raising for the government of India ii) allowing FCF yield and correspondingly the dividend yield of NMDC to increase substantially; we have already see NMDC raising NCDs for completion of the steel project. All incremental capex for the steel plant can be self-funded by the demerged entity and iii) improve return ratios of the mining entity substantially; allow investors a better pureplay mining opportunity. We see execution as the key risk.
* Substantial price hikes will improve EBITDA profile of NMDC in the coming quarters. NMDC has announced price hikes of ~ Rs700/te post Q1FY21. Given the current steel spreads, the slow ramp-up of iron ore production in Odisha and elevated iron ore prices globally, we see substantial scope of price increases going forward. Reported Q1FY21 EBITDA/te of Rs1200/te will get rebased to Rs 2200/2300/te over the next three quarters. We feel the same has not been adequately discounted in the share price.
* Q1FY21 EBITDA/te surprised. Adjusted for ECL of Rs294mn and Rs 1.5bn paid to PMCARES fund, EBITDA/te was Rs 1485/te against Rs 1237/te expected. The cost surprise can be attributed to the bulged other expense of Q4FY20 which has largely normalised in the current quarter.
* Covid-19 impact muted what could have been a blockbuster Q1FY21. NMDC has highlighted Covid impact on operations for Q1FY21. There has been a loss of around 1.823mnte of production and 2.394mnte of sales. This has resulted in a loss in revenue of around Rs7.37bn and PBT of Rs3.17bn.
* Maintain BUY. We are yet to witness any closure in demand from Chattisgarh state (~ Rs 16bn of which NMDC paid Rs6bn in protest) or restart of Donimalai mines. With approaching commissioning of the steel plant and the in-principle approval of demerger, as well as series of price hikes underway, NMDC makes a compelling investment case.
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