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Earnings outlook remains strong

Higher pricing to offset impact of premium levy

* NMDC is a play on strong iron ore prices and volumes, well-reflected in its 4QFY21 result – EBITDA at INR42.4b (+53% YoY) and EBITDA/t at INR3,825 (+113% YoY) were the highest ever.

* We raise our FY22/FY23 EBITDA forecast by 61%/38% to factor in higher pricing and volumes. Reiterate Buy.

EBITDA up 53% YoY on higher pricing and better volumes

* Revenue / EBITDA / Adjusted PAT rose 57%/53%/51% QoQ (in-line) to INR68.5b/INR42.4b/INR31.8b in 4QFY21 on higher volumes and realization.

* Sales volumes stood at 11.1mt, up 29% YoY and 19% QoQ. The Donimalai mines resumed operations in 4QFY21 and contributed 0.44mt (4%) to volumes. Export volumes increased 23% YoY to 0.82mt.

* On 28th Mar’21, an amendment to the MMDR Act (1957) came into effect. This requires NMDC to pay an additional 22.5% royalty on iron ore sales from all mines renewed post 2015 (Kumaraswamy mine due for renewal in Oct’22). This resulted in expenditure of INR1.49b (Chhattisgarh mines – INR1.0b and Donimalai – INR0.5b) in 4QFY21.

* Blended realization grew 32% QoQ to INR6,174/t on sharp price hikes in 4QFY21. As a result, EBITDA/t increased 28% QoQ to INR3,825 on higher iron ore prices.

* The company provisioned INR3.43b towards income tax payments for earlier years.

* Net cash increased by INR19.8b YoY to INR38.1b in FY21.

* FY21 rev / EBITDA / adj PAT rose 31%/41%/33% to INR153.7b/INR87.9b/INR65.9b.

* OCF/FCF stood at INR73.3b/INR57.3b in FY21 (v/s INR20.5b/-INR3.4b in FY20).

Valuation and view

* NMDC is a play on strong iron ore prices and volumes. We expect a strong 14% volume CAGR to 43mt over FY21–23E, aided by the resumption of the Donimalai mines and increased volumes at Chhattisgarh. While the nonrenewal of export contracts implies higher domestic volume sales – given the robust demand and iron ore shortage domestically – we expect NMDC would be able to increase volumes in the domestic market.

* NMDC’s average price in 1QFY22 is higher by 35% QoQ, which would result in EBITDA/t expansion despite a non-pass through premium of 22.5% coming into effect. However, NMDC’s EBITDA margins are likely to dilute due to royalties, and premiums now form ~40% of revenues (v/s ~18% earlier). We expect NMDC’s EBITDA to grow 77% YoY to INR156b in FY22E.

* We value the stock at INR215/share on SOTP, valuing the Iron Ore business at 5.0x FY23E EV/EBITDA. We add the value of the steel plant at 25% of the book value. At CMP, the stock is trading at 4.0x the core Iron Ore Mining business and provides an attractive dividend yield of ~13%. Reiterate Buy.

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