Demerger of steel plant to unlock value
Raised EPS estimates on favorable pricing environment
* The proposed demerger of NMDC’s steel plant should unlock value. Investment in steel plant stands at ~INR170b (INR55/share) and we value it at 50% discount.
* While 1QFY21 results were weak as expected (EBITDA plunged 61% YoY) due to the impact of COVID-19, the pricing outlook has improved substantially on better domestic steel prices and demand. We, thus, have raised our FY21/FY22E EBITDA estimates by 15%/13% and our TP by 10% to INR132. Reiterate Buy. Valuation is supportive at 5.4x FY22 EV/EBITDA.
EBITDA plunges 61% YoY on lower volume and pricing
* NMDC reported rev/EBITDA/PAT of INR19.4b/INR7.5b/INR5.3b, down 41%/61%/57% YoY (v/s est. +3%/-1%/-8%).
* The company contributed INR1.5b to the ‘PM CARES’ fund in 1QFY21 (factored into our estimates). Adj. for this, EBITDA from operations stood at INR9.0b.
* Volumes declined 28% YoY to 6.3mt on low iron ore demand. Export volumes declined 50% YoY to 0.3mt.
* Blended realization per ton declined 18% YoY/17% QoQ to INR3,088/t on sharp price cuts taken during the quarter. Derived domestic realization was down INR629/t QoQ to INR2,870/t.
* Reported EBITDA/t declined 45% YoY to INR1,203/t (v/s est. INR1,194/t). Operational EBITDA (excl. INR1.5b contribution) stood at INR1,442/t (down 34% YoY).
* Other income declined 42% YoY to INR717m.
* PAT came in at INR5.3b (8% below est.) due to higher tax rate of 29.6% (v/s est. 25.2%).
* NMDC in its board meeting approved the demerger of its 3mtpa Nagarnar steel plant. Its investment in the steel plant stood at ~INR170b (INR55/share) at end-1QFY21.
Demerger of steel plant positive
* NMDC has taken cumulative price hikes of INR700/t in Jul-Aug’20, thereby, reversing most of the INR900/t price cuts take in 1QFY21. It expects pricing to improve further.
* Management expects de-merger of the Nagarnar steel plant to get completed in 9-10 months. Shareholding pattern in the demerged entity would remain as that of NMDC. It is evaluating options of listing or divestment in the demerged entity.
* NMDC aims to raise debt of INR50b in phases for to meet capex and working capital requirement of the steel plant.
* It expects to commission the steel plant by Jun’21. Ownership of iron ore/ coal mines would remain in the hands of NMDC. The company would supply iron ore/coal to the steel plant at arm’s length price.
* Management expects to receive lease renewal approval for the Donimalai mine. Clearance for expansion of the Kumaraswamy mine from 7mtpa to 10mtpa is also expected over the next 3-4 months.
Valuation and view
* We see NMDC as a second order beneficiary of improving domestic steel demand and prices. We expect both iron ore prices and volumes to improve on higher demand from secondary steel players. Jul-Aug’20 has already seen price hikes of INR700/t (30%), thereby reversing most of the INR900/t correction seen in 1QFY21. A 10% price hike improves EBITDA by 15%.
* The company also has a few optionalities, which have not been priced in currently: (a) any favorable decision on the Donimalai mine in Karnataka would increase volumes by ~20%, and (b) planned divestment of the 3mtpa Nagarnar steel plant would unlock value (~INR55/share investment in steel plant done so far).
* Valuation is also attractive at 3.70x FY22E EV/EBITDA for the core iron ore business (after netting out steel plant @50% of the book value/cash pile).
* We expect NMDC’s EBITDA to decline at 5% CAGR over FY20-22E to INR55.9b, due to the likely flat volumes and 4% lower blended iron ore realization during the period.
* Also, the stock provides dividend yield of ~5% at current prices. We value the stock at INR132/share on SOTP basis – 5x FY22E EV/EBITDA for its core iron ore mining business and 50% book value for the Nagarnar plant. Reiterate Buy.
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