IGI Logo

Volume-led upgrades likely

We upgrade NMDC to BUY from ADD as: 1) Sales volume in FY24E may breach the 32-40mnte range; 2) long-term volume visibility is clearer as the roadmap for 100mtpa by FY30, though aspirational, is being worked on; 3) commercial mining in Odisha is progressively getting undermined, resulting in more opportunity; and 4) RoE may improve further from the current level of 22% as mining business takes the centre stage and steel plant is demerged. Taking cognisance of the sales volume until Aug’23 and favourable price outlook, we raise our FY24E/FY25E EBITDA by 22%/38%, respectively. Furthermore, we raise EV/EBITDA multiple to 5.5x (earlier 5x) in view of robust volume trajectory in future. Our revised TP works out to INR 180 (earlier INR 130).

Sales volume trajectory moves beyond 40mtpa

NMDC’s operating performance as of YTD Aug’23 has been robust with 23.1% and 29.7%, YoY growth in production and sales volume, respectively. In our view, the management’s guidance of 47-49mnte and 50-54mntet for FY24/FY25 looks achievable as: 1) Supply to Chhattisgarh-based units has picked up; 2) supply to NMDC steel plant (5-6mtpa) has commenced; 3) supply from Karnataka has gone up 41.4% YoY as of YTD Aug’23 mainly due to the traction from JSW Steel. There are plans underway to increase both production and evacuation capacities for achieving the sales volume of 100mtpa by FY30. We believe sales volume growth would be the core focus now as the steel plant has been demerged and NMDC has an opportunity to consolidate its position in merchant mining space even in Odisha where mining scenario has changed considerably post the auctions

RoE improvement and volume growth might result in upgrades

With significant capital allocation towards steel plant since FY12, we saw NMDC’s RoE gradually reducing from a healthy 33.6% in FY12 to 21.7% by FY21. Despite the change in mining law that necessitates higher royalty payout, we expect RoE to improve hereon as high margin and low capex intensive mining business ramps up. Our revised FY24E/FY25E EBITDA at INR 73.3bn/INR 80.2bn is 7.7%/16% ahead of consensus, possibly due to higher volume estimates than the street. We expect consensus estimates to be revised up based on the operating performance of the company

Outlook: Volume ramp-up on cards; upgrade to BUY

We believe NMDC is likely to show robust volume growth as focus returns to mining business post steel plant demerger. We also expect an uptick in domestic steel production and change in iron ore sourcing pattern in Odisha to act as additional headwinds for the company to boost sales volume. Our EBITDA/te estimates for FY24- 25E at INR 1,525-1,550 are lower than the past 18-year historical average of INR 2,060/te, mainly due to an additional royalty levied post the change in mining law. We believe volume ramp up may lead to RoE sustaining at 20% plus level. We have revised our FY24E/FY25E volume estimate by 2.5%/5.8% and recalibrated our iron ore price assumptions, in line with the prevailing prices. As a result, our FY24E/FY25E EBITDA is up by 22%/38%. We have also raised our EV/EBITDA multiple by 10% to 5.5x (earlier 5x) taking view of improving RoE and better volume growth prospects. As a result, our revised TP works out to INR 180 (earlier INR 130). We upgrade NMDC stock to BUY (earlier ADD)

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

SEBI Registration number INZ000183631