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Earnings outlook remains strong

Available at an attractive dividend yield of ~13%

* NMDC’s result reflects strong iron ore pricing and volume growth as EBITDA jumped 4.5x YoY to INR42.1b. EBITDA/t, at INR4,455 (+2.7x YoY), was the highest ever, despite a levy of 22.5% premium on iron ore sales.

* We broadly maintain our FY22E/FY23E EBITDA forecasts. We remain positive on NMDC, given its strong earnings outlook driven by volume growth, and better iron ore prices. We expect the steel plant de-merger to unlock value for shareholders, given the favorable outlook for the steel industry. We reiterate our Buy rating.

EBITDA in line as realization miss was offset by lower costs

* Revenue/EBITDA/adjusted PAT stood at INR65.1b/INR42b/INR31.9b (-5%/- 1%/nil QoQ) as seasonal weakness in volumes was offset by better pricing. However, the same was -17%/in line/+2% v/s our estimate. Revenue was a miss due to lower than expected increase in realization. Costs benefitted from inventory gains in 1QFY22, resulting in an in line EBITDA/PAT.

* Sales/production volumes stood at 9.4mt/8.9mt (+51%/+35% YoY and - 15%/-28% QoQ). The growth in volumes was supported by a resumption in Donimalai mines, which contributed sales volumes of 1.33mt (14%). Export volumes were nil as the GoI removed the preferential duty on exports benefit to NMDC.

* Blended realization improved by 12% QoQ to INR6,895/t, (est. INR8,167/t). The miss on realization was on account of a 22% QoQ growth in realization (excluding duties) at INR5,733/t v/s average growth of 35% in the base iron ore price. However, NMDC benefitted from inventory gains of INR5.4b (~INR570/t) in 1QFY22, which offset the miss in realization. As a result, EBITDA/t improved by 16% QoQ to INR4,455 (est. INR4,418/t). NMDC provisioned for INR9.9b towards a 22.5% premium payable on sales.

Valuation and view

* NMDC is a play on strong iron ore prices and volumes. We expect a strong (13%) volume CAGR to 42mt over FY21-23E and higher iron ore prices, which should result in a 12%/16% EBITDA/PAT CAGR over FY21-23E to INR111b/INR83.5b, despite a 22.5% premium levy on iron ore sales. We have factored in iron ore fines/lumps prices of INR5,500/INR6,400 per tonne in FY22E and INR4,500/INR5,200 per tonne in FY23E.

* We value the stock at INR220/share on a SoTP basis, valuing the iron ore business at 5x FY23E EV/EBITDA and the steel plant ~25% of its book value. At the CMP, the stock is trading at 3.7x its core Iron Ore Mining business and provides an attractive dividend yield of ~13%. We reiterate our Buy rating.

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