Published on 4/07/2020 10:57:13 AM | Source: Emkay Global Financial Services Ltd

Sell NMDC Ltd For Target Rs. 72 - Emkay Global

Posted in Broking Firm Views - Long Term Report| #Mining Sector #NMDC Ltd. #Emkay Global Financial Services Ltd.

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Q1FY21 production picks up, sales lag

* Production for Q1FY21 stood at 6.61mt, down 22% yoy/up 10% qoq. On a yoy basis, production fell due to subdued production in April and May. June production seems to have recovered but with the onset of monsoon, it is likely to fall in Q2.

* Q1FY20 sales declined sharply by 27% yoy and 25% qoq due to poor demand from steel producers and Covid-19-related slowdown. Sales fell significantly in Chhattisgarh by 35% sequentially.

* NMDC has raised prices by Rs200-250/t recently due to increased steel production after the lockdown ended. However, with the onset of monsoon and rising Covid-18 cases, we expect steel production to slow down in Q2, leading to reduction in prices.

* We maintain Sell with a TP of Rs72, based on 4x Mar-22 EV/EBITDA estimates with UW in Sectoral EAP. Rising Covid-19 cases in India and the second wave in various parts of the world may keep demand for steel and consequently ore subdued.


* Sequential jump in production due to low base: Production was up sequentially in Q1, due to a shutdown in Chhattisgarh for a couple of days in March and low base in Karnataka in Q4 as NMDC exhausted its EC limit for FY20, with only 0.16mt production possible in March compared to the 50kt monthly run rate.

* Monthly production: June production stood at 2.52mt, flat yoy/up 10% mom. Production fell in Karnataka due to low demand, but rose in Chhattisgarh by 11% yoy and 14% mom as the mining area was unaffected by the pandemic and production continued smoothly.

* Monthly sales: June sales came in at 2.48mt, down 7% yoy and 3% mom. Sales dropped in Chhattisgarh and Karnataka sectors due to poor demand. We expect July offtake to be low in Karnataka as the key customer there, JSW Steel, is operating at a lower level due to the spread of Covid-19.

* Outlook and Valuation: We remain concerned about rising cases of Covid-19 and with the onset of monsoon and a traditionally weak quarter for steel and ore, we believe that the stock should correct in the near term. We value the stock at 4x FY22 EV/EBITDA estimates. Key risk: Increase in ore prices in the near term.


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