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Weak results; costs rise | maintain Neutral

* NMDC’s net sales declined 51% YoY and 30% QoQ to INR33b in 2QFY23 (in line). Iron ore sales fell 6% YoY (up 8% QoQ) at 8.43mt. YoY decline in iron ore sales reflects demand slow down in the merchant ore market.

* EBITDA shrunk 73% YoY and 55% QoQ to INR8.5b, and was significantly lower than our estimate of INR12b despite in-line revenue, indicating higherthan-estimated operating costs partly offset by lower royalty and additional premium as IBM prices come at a lag. EBITDA/t at INR1,009 was down 71% YoY and 59% QoQ, which reflects higher costs as both sales volume and ASP were in line.

* APAT fell 62% YoY and 40% QoQ to INR8.9b, 9% miss on our estimate of INR9.7b. While EBITDA miss was at 27%, APAT miss was just 9% due to significantly higher-than-estimated other income (+3.8x YoY/+2x QoQ).

Iron ore demand remains weak, demerger not a trigger in our view

* After imposition of export duty on steel (15%), iron ore (50% for all grades) and pellets (45%) in May’22, NMDC reduced the price of iron ore fines/lumps by INR2,350/INR2,200, respectively. However, since Aug’22 to date, NMDC managed to raise iron ore lumps prices by INR200/t and fines by INR100/t and has since then rolled over the prices.

* We note that the sharp rise in thermal coal prices along with weak demand for secondary TMT has kept prices of iron ore low. The situation has not changed much since then.

* NMDC has demerged the steel plant with shareholders of NMDC getting similar number of shares in NMDC steel plant. The demerger and listing of the shares in NMDC steel plant is no trigger in our view. We believe the existing investors who received shared through demerger will largely be sellers in that company post-listing.

* All large private steel players in India have their own expansion plans in HRC, which is at a notably lower capex than NMDC. We do not expect the NMDC steel plant to be divested at a premium for several reasons.

Valuation and view

* Due to the weak results, we have cut our FY23/24 EBITDA estimates by 6%/1%, respectively, and PAT estimate by 2% each. We note that a possible demand recovery in China can lead to improved demand in steel and consequently steel prices in India.

* We believe iron ore prices will remain under pressure and will not pick up as long as export duty on iron ore continues. We also expect steel players to ramp up their captive mines that will further reduce the demand for merchant iron ore.

* The stock is trading at 4.1x FY23E EV/EBITDA on core mining business. We value the steel business at 50% to the CWIP at INR38/sh. We believe the stock adequately reflects the current downturn in the domestic iron ore market. Maintain Neutral with a revised SoTP-based TP of INR124 (v/s INR128 earlier).

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