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Aiming for volume growth

NMDC’s Q4FY23 EBITDA was in line with our estimates, and 7% ahead of street estimates. Key highlights: 1) Best-ever production and sales volume; 2) Chhattisgarh segment comprised 68% of total sales volume (Q4FY22: 69%; Q3FY23: 70%); 3) EBITDA margin rebounded QoQ to 37%; 4) FY23 end net cash stands at Rs66.3bn; 5) exceptional income of Rs12.4bn in FY23 aided EPS to Rs18.9/share and 6) Board has recommended second interim dividend of Rs2.85/share, taking the total FY23 dividend to Rs6.6/share.

Going ahead, despite price headwinds, we see the company focusing on adding volumes. While we consider the target of 46-50mnte production volume in FY24 as daunting, we believe NMDC is likely to gain from overall steel production growth in the country, expected at 6-7% in FY24E. We introduce FY25 estimates at this stage and roll-over the valuation to FY25E. Our revised TP works out to Rs118 (earlier Rs130) on an unchanged 5x FY25E EBITDA. Maintain ADD.

* Performance rebounds QoQ on higher volume. NMDC’s Q4FY23 EBITDA was ahead of street estimates though in line with ours. Key highlights: 1) Sales volume at 12.5mnte (up 1.4% YoY; 30% QoQ) was the best ever; 2) sales volume in Chhattisgarh segment rose 27% QoQ owing to better offtake by pellet producers post the removal of export duty and AM/NS ramping up production while in Karnataka segment it was up 37% QoQ mainly due to higher sourcing by JSW Vijayanagar; 3) performance was boosted by the receipt of Rs9.6bn from Monitoring Committee towards 10% of the amount withheld for the period Jan’19 to Mar’22 and Rs2.8bn of core profit on strategic divestment of NINL; 4) blended realisation rose 21% QoQ at Rs4,696/te as the company raised the notified prices throughout the quarter; 5) royalty as a %age of revenue was 44.8% compared to 50.2% QoQ (Q3FY22: 40.3%) owing to higher production and consideration of IBM price for only Jan’23 (while price increased throughout the quarter); 6) EBITDA/te at Rs1,738 rose 45.6% QoQ mainly due to operating leverage benefits on higher sales volume. Going ahead, we expect EBITDA to decline due to price headwinds; however, the management has guided for production/sales volume of 46-50mnte in FY24 to offset the adverse impact of lower profitability.

* Volume growth is key: During Q4FY23 earnings call, management guided for production/sales volume of 46-50mnte in FY24; however, we have taken 44mnte/45mnte for FY24E/FY25E, respectively. We await the completion of key infrastructure projects such as doubling of KK line, slurry pipeline up to Vizag and ramp up of additional capacity at Kumaraswamy- critical for volume to reach 50mnte. While we understand that opportunity size is likely to expand as Nagarnar Steel Plant ramps-up production and pellet plants at Vizag commence production, logistics bottlenecks exist, not to mention the rake availability at a mere 50% of Bailadila sector capacity.

* Outlook: Volume growth may partially offset price headwinds. We believe volume growth is key for maintaining earnings growth as price headwinds prevail, exacerbated by the sharp dip in global iron ore price. Hence, we would keep a close tab on production target of 50mnte for FY24. We maintain ADD rating on the stock with a revised TP of Rs118 (earlier Rs130) on an unchanged 5x FY25E EBITDA as we roll-over valuations to FY25E.

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