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Q4 margins impacted due to one-offs; Massive capex to fuel earnings growth ahead

NMDC Ltd reported highest ever Iron ore production and sales number during FY24, in Q4FY24. Revenues grew 11% YoY to ?64bn in Q4FY24, was in-line with our estimates (QoQ up 20%) led by better realizations during the quarter. Blended ASP stood at ?5,191/t, up 10% YoY and ?442/t higher than our estimate of ?4,749/t. Iron ore production came in at 13.3mt down 6% YoY and up 8% QoQ, while sales stood at 12.5mt +1% YoY and +10% QoQ. Volumes in Kumaraswamy mines were impacted as the mine was shut since mid-Feb due to EC limit and recent conflict with employees on wage revision impacted ~1mt volume in May 2024. NMDC’s EBITDA came in at ?21bn (-3% YoY & 5% up QoQ), 5% below our estimate of ?22 bn. EBITDA margins came in at 32% (457bps down YoY) vs 37% in the year-ago quarter the miss was largely due to higher operating cost (57% up YoY), higher royalty expenses (17% up YoY) and higher other expenses (11% up YoY). Blended EBITDA/t stood at ?1,681/t (-4% YoY), Adjusted Profit after Tax (APAT) was down 10% YoY at ?14.1b (below our estimate of ?18.2bn), APAT was hit due to higher depreciation (+19% YoY) and tax expenses (+86% QoQ) during the quarter. APAT margin came in at 22% in Q4FY24 vs 27% in the year-ago quarter dropping 510 bps YoY & 919 bps on a QoQ basis. In FY24 NMDC’s production volume stood at 45.1mt (+10% YoY), and sales volume was 44.5mt (+16% YoY). Revenue came in at ?213 bn (+21% YoY), EBITDA was ?73 bn (+21% YoY), and APAT stood at ?56 bn (+18% YoY). EBITDA/t stood at ?1,640 (+4% YoY) in FY24. The Board declared a final dividend of ?1.5/share (along with an interim dividend of ?5.75/ share) during FY24.

The benefits of the price increases implemented in Q1FY25 are expected to support future growth as domestic demand remains robust. Management has detailed a long-term capital expenditure program amounting to ?500bn, aimed at increasing mining capacities to approximately 100mt by FY31E. This program includes investments in evacuation infrastructure and enhancements to the distribution network. Board approvals for approximately ?50bn in capital expenditure have been obtained, with peak annual capital expenditure of ?80-90bn projected to commence in FY27E.

NMDC is well-positioned to leverage strong volume growth in the domestic steel markets over the coming year, with the mining business anticipated to achieve a compound annual growth rate of approximately 9% from FY24 to FY26E.

Key Highlights from the management commentary

* Guidance: NMDC reaffirms its target of 50 mt, supported by newly sanctioned Environmental Clearance (EC) limits. As per the management, domestic steel demand is expected to remain robust over the next decade.

* FY25/26 Production Target: Management anticipates producing ~50 mt of iron ore by FY25 and ~54 mt by FY26. NMDC is targeting a production of 100 mt by 2030-31.

* Royalty Expense: Royalty percentage to sales increased to 47% in 4QFY24, with an expectation to be 43% of revenue moving forward.

* Price hikes: Implemented two price hikes in Q1FY25, aligning prices with landed costs.

* Capital Expenditure (Capex): Allocated ?17.5-18bn for FY24 and ?20-21bn for FY25, with a significant increase expected in FY26. Incurred a capex of ~?21bn during FY24, with plans to spend ?15-20bn in the current fiscal year.

* Five-year Investment Plan: Plans to invest ?500 bn over the next five years across various projects, including expanding pellet and beneficiation plants to increase capacity from 2 mt to 6 mt by Q3FY25.

* EC approval of Mines: Obtained 1.5 mt of EC, with plans to increase capacity to 10 mt, bringing overall capacity to 64 mt by next year. NMDC aims to enhance EC at Kirandul to 30-35 mt and Bacheli to 30 mt over the next 4-5 years. The company has applied for a 10% increase in EC limits for Deposit 5 and 11 at Bacheli.

* Wage Negotiation: Largely completed with no major changes expected in wage costs. Provisioning has been made, with no sharp rise anticipated. NMDC further plans to recruit 800 people for expansion, with the process likely to take six months.

* Major Clients: JSW contributes ~30% of total volumes, Arcelor Mittal Nippon Steel (AMNS) ~18%, and Rashtriya Ispat Nigam (RINL) ~15%.

* NMDC Steel to breakeven by Q2FY25: Current monthly production run-rate is 0.12 mt, procuring iron ore from NMDC. Commissioned PCI (pulverized coal injection) to reduce costs, with 90% utilization expected to achieve a 25% EBITDA margin with stable pricing and cost levels.

Valuations & View

On the back of NMDC’s strong operational capacity, aggressive expansion plans, robust net cash position and continued strong tailwinds for domestic steel demand we expect NMDC to clock Revenue/EBITDA/PAT CAGR of 9%/16%/14% over FY25-26E. At CMP, the stock is trading at 6.8x/5.3x EV of FY25E/FY26E EBITDA. We maintain our ‘BUY’ rating with a revised TP of ?301 (earlier ?297) valuing at 6.7x EV/EBITDA of FY26E

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