Margin outlook strong despite recent price cut

Retain Buy despite risk of higher levies

* NMDC is a play on strong iron ore prices and volumes, which is well reflected in its 3QFY21 result. EBITDA at INR27.7b (+70% YoY) and EBITDA/t at INR2,982 (+54%) were the highest ever.

* Margin should rise further in 4QFY21 as the spot price (even after the correction in Feb’21) is still ~17% higher than its 3QFY21 average. Moreover, volume should get a boost in FY22 from the restart of Donimalai mines. Reiterate Buy.

EBITDA up 70% YoY on better volume and pricing

* Reported revenue/EBITDA/adjusted PAT rose 45%/70%/49% YoY to INR43.6b/INR27.7b/INR21/1b and was 7%/4%/2% below our estimate.

* Volume rose 10% YoY to 9.3mt (v/s our expectation of 9.4mt), led by a strong improvement in domestic demand and 14% growth in exports (at 0.74mt). EBITDA/t rose 54% YoY to INR2,982 (3% below our estimate ) due to higher iron prices.

* Blended realization increased 31% YoY to INR4,691/t (+39% QoQ) due to higher prices, but was 5% below our expectation. Derived domestic realization was up INR1,271/t QoQ to INR4,469/t (v/s our estimate of INR4,782/t). However, realization net-of royalties and cess was 2% below our expectation.

* Revenue/EBITDA/adjusted PAT stood at INR85.2b/INR45.5b/INR34.2b in 9MFY21, flat/-3%/flat YoY. Volumes stood 3% lower YoY at 22.2mt.

Valuation and view

* NMDC is a play on strong iron ore prices and volumes. We expect margin to rise in 4QFY21 as the spot price is ~17% higher than its 3QFY21 average. We expect margin to peak out in 4QFY21, but still stay robust.

* We expect volume growth to be strong at 10% CAGR over FY21-23E, aided by the restart of Donimalai mines, which should start contributing soon. We have factored in 4mt (13% of total) volume from Donimalai mines in FY22E.

* The government’s proposal to levy an additional premium on NMDC’s renewed mining leases has emerged as a key overhang on the stock. If a premium of 22.5% of revenue is levied on all mines of NMDC, it poses a downside risk of ~30% to our FY22E EBITDA.

* We value the stock at INR140 on a SoTP basis, valuing the iron ore business at 4x FY22E EV/EBITDA, amid uncertainty over the levy an additional premium on Chhattisgarh (renewed in FY20) and Kumaraswamy mines (renewal due in Oct’22), and the steel plant (~25% of book value). At the CMP, the stock is trading at 3.4x its core iron ore mining business and provides an attractive dividend yield of ~8.5%. Reiterate Buy.

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