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Steel plant de-merger the next trigger point

Reduction in iron ore prices in line with expectations

Iron ore prices reduced by INR300–500/t

* NMDC has announced a reduction in iron ore prices by INR300–500/t, driven by a consistent decline in domestic pellet prices.

* The price of fines is down by INR500/t, with the price of lumps / DR-CLO having been reduced by INR300/350.

* After a cumulative price hike in iron ore fines by INR2,350/t in 1QFY22, the company has been steadily lowering the prices of the ore in line with the reduction in domestic steel and pellet prices. The cumulative decrease in 2QFY22 and 3QFY22 stands at INR2500/t.

* With the current round of reductions, iron ore prices are now lower compared to the start of the year. However, we note that primary rebar / secondary rebar / HRC prices are still 10%/5%/25% higher than the prices prevalent at the start of the year. Hence, further price correction by NMDC may not be warranted.

Steel plant de-merger on track

* The management has guided that the demerged financials would likely be presented to the board in 2HFY22.

* This is an important step towards a formal de-merger of the steel plant.

* Once the accounts of the demerged entity are approved, the company is likely to move to the next step. This involves a vertical split of the company, with every shareholder of NMDC becoming a shareholder in the steel plant (Nagarnar Iron and Steel Plant – NISP), as per the then prevailing shareholding; as well as obtaining various regulatory and statutory approvals, following which the sale process of NISP should commence.

* We expect the de-merger/sale of NISP, which is the key trigger for the stock to be completed by 1HFY23

Outlook and valuation

* We believe the iron ore market is likely to stabilize at end-4QFY22 once China puts a stop to the relentless cuts on steel production – which have resulted in a steep correction in iron ore prices in the international market.

* Adjusted for the value of the steel plant– which we are currently valuing at 25% of CWIP – NMDC’s Iron Ore business is trading at FY22E/FY23E EV/EBITDA of 3x/3.5x. We value the stock at INR185 on an SOTP basis, comprising (a) the Mining business (valued at 4.5xFY23 EV/EBITDA at INR167) and (b) the Steel asset (valued at 25% of CWIP at INR17/sh). Key risks to our call are a further slowdown in China through FY23 and the uncontrolled spread of the Omicron variant of COVID-19.

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