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Revenue in line; lower royalty expense leads to EBITDA beat

Highlights of the 1QFY25 consolidated results:

* Revenue was in line with our estimate at INR54b, flat YoY/down 17% QoQ. The QoQ decline was primarily due to weak volumes, partially offset by higher NSR.

* Iron ore production stood at 9.19mt (-14% YoY/-31% QoQ), while sales stood at 10.1mt (-8% YoY/-20% QoQ). ASP improved to INR5,337/t (+9% YoY/+4% QoQ), in line with our estimate.

* EBITDA came in at INR23b (+17% YoY/+11% QoQ) against our estimate of INR18b. The beat was primarily due to the lower royalty expense and other operating costs. EBITDA/t stood at INR2,324 (+28% YoY/+39% QoQ) vs. our estimate of INR1,741.

* APAT was INR20b (+19% YoY/+37% QoQ) vs. our estimate of INR15b, aided by strong operating performance.

Highlights from the management commentary

* NMDC reiterates volume guidance of 50mt for FY25, despite weak volume in 1QFY25, caused by slower production in May and erratic rainfall.

* The management has guided that 2Q NSR would decline to ~INR4300/t. NMDC cut prices by a cumulative INR1,000/t in the last few months, which was in tune with the market trend.

* The royalty as a percentage of sales stood at 37% in 1Q vs. 47% in 4QFY4, due to weak production volume.

* Regarding the Supreme Court ruling, NMDC expects a negligible impact as, being a merchant miner, the additional cost is passed on to customers.

* NMDC currently has liabilities of INR1.44b from Chhattisgarh and INR25b from Karnataka and expects to recover them from customers.

Valuations remain attractive; fundamentals are supportive

* While revenue was in line, lower cost led to operating outperformance. NMDC has cut prices in 2Q due to weak global prices and onset of monsoon, which might keep operating profit under pressure in the coming quarters.

* With requisite approvals in place, production is likely to ramp up in FY25/ FY26. Major steel manufacturers in India plan to double their capacity by FY30-31E given a robust demand outlook led by the government’s infra push, which will fuel the overall demand for iron ore.

* With challenges owing to pending EC clearances behind, volume growth is expected to be robust. Despite the recent price cut in 2Q, ASP is expected to improve in 2HFY25. At CMP, NMDC trades at 4.7x FY26E EV/EBITDA. We marginally lower our FY26 APAT estimates by 5% and retain our BUY rating on NMDC with a revised TP of INR280 (6.5x FY26 EV/EBITDA).

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