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China opening to help iron ore; reiterate BUY

Focus on finishing real estate projects in China to boost steel, ore demand

* The Chinese government appears to be focusing on reopening the economy now after three long years of following a strict zero covid strategy (ZCS), which has led to significant reduction in GDP growth rate.

* China has taken several measures to open its economy in the recent times. These include reducing quarantine period for incoming visitors, doing away with negative virus tests and health code checks to travel domestically not required anymore. The government has in fact stopped reporting cases on a daily basis, indicating its firm resolve to open the economy irrespective of the consequences.

 * We believe these measures are taken to boost the GDP growth in China which in turn should lead to higher steel production and consequently demand for iron ore and pellets.

* We believe NMDC will be a beneficiary from rising demand for iron ore globally as the company would increase its production of iron ore and maintain margins, which are sufficient to propel its valuations further, given that it does not have the baggage of steel plant anymore.

* We have marginally increased our FY23/24 EBITDA estimate by 3%/4% to factor in marginally higher ASP on renewed Chinese demand. We value NMDC at 5x FY23 EV/EBITDA with higher volume from both Karnataka and Chhattisgarh. We reiterate our BUY rating with a revised TP of INR 138 (v/s 134 earlier)

Iron ore prices set to rise further

* NMDC has rolled back the INR 300 price reduction taken in mid-Nov’22, primarily due to withdrawal of export duty on iron ore, pellet, and steel by the government. Although NMDC does not export anything, the withdrawal has opened up opportunities for the company.

* With recent increase in exports in both iron ore and pellet and robust OMC auctions, we expect NMDC to announce further hike in iron ore prices.

No more steel plant capex hangover; expect strong dividend

* NMDC has formally de-merged its balance sheet and the process of listing of the steel plant is on. We believe the government is likely to dis-invest its shareholding in the NMDC steel plant.

* Any additional capex now on the steel plant will be through the balance sheet of the steel plant without recourse to the mining business.

* NMDC does not have a very large capex pipeline for the mining business, hence, we expect a strong dividend.

Valuation remains attractive, fundamentals supportive; retain BUY

* The stock is trading at 4x our FY24 EV/EBTIDA. With no more capex-intensive programs, the company is likely to generate a strong cash flow despite us factoring a lower iron ore price regime.

* With China re-opening and rushing to finish real estate projects, we expect demand for iron ore to remain strong in the near term. In addition, we expect with winter in China, focus shall again be on importing more pellets from India which should drive demand for iron ore in India. The government waiving off pellet export duty is an added advantage.

* We expect NMDC to continue with volume CAGR of 11.5% from FY21-25 on the back of higher volumes in both Chhattisgarh and Karnataka. We expect NMDC to clock a record 51mt in FY25.

* We build a DPS of INR 12 for FY24 and INR 10 for FY25, implying a payout of 59- 61% and an attractive dividend yield of 9.5%/7.9% for FY24/25, respectively.

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