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Lower than expected royalty incidence drives beat

NMDC reported better than expected Q4FY21 EBITDA at Rs42.4bn. FY21 EBITDA to OCF conversion (83%) has been highest since FY16. The key element of EBITDA surprise has been lower than expected royalty incidence of Rs1.5bn for Q4FY21 – implies Rs160/te on volumes of 9.3mnte (ex kumaraswamy mines). Given additional incidence amounts to 22.5%, we seek more explanation on the same at the call scheduled today. EBITDA/te at Rs3,818 is set for another increase in Q1FY22; looks peakish given increasing domestic supply, long product demand and price headwind. With 22.5% additional premium extended to all mines (barring Kumaraswamy), the risks to business model has significantly reduced. We maintain HOLD with a revised target price of Rs182/share (Rs114 earlier); the increase in target price reflects the bulge in iron ore prices/EBITDA trajectory.

Substantial price hikes have taken EBITDA to ~ Rs3818/te from Rs2980/te QoQ.

Q4FY21 witnessed 29% QoQ and 20% YoY increase in sales volume. Restart of Donimalai in Feb, 21 helped Karnataka sales to increase 60% YoY and 22% QoQ (contributes 16% of overall sales now). Despite industry wide disruption May, ’21 volumes for NMDC at 3.3mnte is commendable. Pricing and EBITDA/te though appears peakings.

Key notables for Q4FY21.

Rs2.27bn of Expected credit loss has been provided for FY21 (Rs935mn for Q4FY21) in other expense – Rs2.34bn of provision for bad and doubtful debts can be seen in cashflows. The impact of higher royalty (150% of the royalty payable) on all the iron ore mines of NMDC except Kumaraswamy Mines at Karnataka is Rs1.5bn for the current period and is included under Royalty and other levies.

Key policy changes.

With the increased incidence of royalty, the renewal of mining leases and continuity of mining risks is behind the company. Government of India was subsidising exports of NMDC to Japan and Korea, which has effectively stopped from Q1FY22. Thus export duty of NMDC becomes 30%. Exports can still happen if its viable to export with a duty of 30%. There, will also be no separate railway freight concessions on the ore.

Demerger of steel plant can lead to value unlocking.

The approval by the Board of NMDC to demerge the steel plant, i.e. creating a separate listed company with a shareholding eventually akin to NMDC, will be value-accretive to the minority shareholders. If pursued in a time-bound manner, this can lead to: i) separate avenues of fund raising for the Government of India; ii) allowing FCF yield and correspondingly the dividend yield of NMDC to increase substantially (we have already seen NMDC raising NCDs for completion of the steel project; all incremental capex for the steel plant can be self-funded by the demerged entity); and iii) improve return ratios of the mining entity substantially (allowing investors a better pureplay mining opportunity). We see execution as the key risk

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