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Strong pricing and volumes augur well

Hikes in iron ore prices continue

Iron ore prices increased by INR400/t

NMDC has announced an increase in iron ore prices by INR400/t for both fines and lumps, marking a third price hike within 4QFY22 and raising the offer prices to INR4,960/t and INR6,000/t, respectively. The price hikes have been driven by strong steel and international pellet prices.

The price of DR-CLO has been increased by INR480/t raising the offer price to INR7,200/t.

These have resulted in a cumulative price increase of INR900/t for fines and INR1,100/t for lumps.

We expect the iron ore prices to taper going forward into FY23 led by better market balance.

Commissioning of steel plant and demerger of business in 1HFY23E

The process of commissioning of the steel plant has already started and hot metal production is likely to start in 1HFY23

We believe the demerger of the Nagarnar Iron and Steel Company (NISP) will be the key trigger for the stock. Thereafter, the government is likely to call for bids from potential suitor, which should likely culminate into sale of the government’s holding in the steel plant to the new owner.

The management has highlighted that the demerged financials would likely be presented to the Board in 1HFY23E

The demerger of accounts is a precursor to split the company into: a) existing mining operations and b) new steel business.

Other steps include: calling for a members and creditors meeting, and obtaining approvals from relevant statutory authorities.

The key step of demerger will be a vertical split of the shareholding as well as issuance of shares in the steel plant to the existing shareholders of NMDC in the same proportion as their holdings in NMDC.

Valuation remains inexpensive; retain BUY with 41% potential upside

We believe that domestic iron ore prices should correct in FY23E, as China is likely to curb steel production. This will result in lower international iron ore prices too

Further, increasing supplies from the auctioned iron ore mines should lead to lower prices in FY23E. However, we expect NMDC to increase its production and sales volume by 5%.

NMDC is currently trading at 2.4x/2.9x our FY22/23 EV/EBITDA for the core mining business.

Our SoTP-based TP of INR216 (up from INR214) comprises: a) INR187 for the core iron ore mining business, factoring in higher ASP and volume post the current price hike and valuing the same at 4.5x FY23 EV/EBITDA and (b) INR29 for the steel CWIP at 50% discount.

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