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Rising steel demand, capacity expansion to boost growth Volume growth to be robust in 2HFY25

* In 2QFY25, NMDC reported production volume of 8.3mt, down 10% QoQ and 6% YoY, totaling 17.5mt for 1HFY25 (down 11% YoY). Weak volume growth was due to a heavy monsoon. NMDC has maintained its production target of 50mt for FY25 and expects volumes to ramp up significantly in 2HFY25.

* NMDC took a cumulative price cut of INR1,000 per ton during Jun-Aug’24 for lumps/fines to INR5,350/INR4,610 per ton, considering weak global prices and subdued steel demand due to monsoon. Recently, NMDC announced a price hike of INR400/t for both lump and fines in Oct’24.

Robust capex to support volume momentum; incremental EC to drive volumes beyond FY26

* NMDC is undertaking multiple capex projects to augment ore production, improve the product mix and enhance mining capacities.

* The 15mt slurry pipeline from Bailadila to Nagarnar is progressing well with almost all approvals received. Out of 131km, ~73km has already been laid and the rest to be done soon.

* As of now, NMDC’s total EC limit is ~51mt, of which ~19mt each is in Kirandul and Bacheli, and the rest in Karnataka.

* NMDC has got 1.5mt EC for Kumaraswamy mines and is trying to take 10mt, which will take its total capacity to 64mt by next year.

* NMDC plans to enhance EC at Kirandul and Bacheli to 30-35mt over the next 4-5 years.

Valuation and view

* India domestic crude steel capacity reached ~168mt in FY24 with capacity utilization of 82%. This would translate into iron ore demand of ~280mt during FY24, with NMDC holding a market share of about 16%. As crude steel capacity rises to 300mt by FY30-31, total demand for iron ore would be ~435-445mt. We believe NMDC is well placed to capitalize on the opportunities ahead.

* NMDC has planned capex for various evacuation and capacity enhancement projects, which are expected to improve the product mix and increase its production capacity to ~100mt by FY29-30E.

* At CMP, NMDC trades at 4.2x FY27E EV/EBITDA and 1.6x FY27E P/B. We reiterate our BUY rating on the stock with a TP of INR290, valued at 5.5x FY27E EV/EBITDA.

* Key risks:

1) More than 100 iron ore blocks have been auctioned since FY16; when the remaining captive mines become operational, it would lead to an increase in the supply of iron ore, thus increasing the competition for NMDC; 2) NMDC relies heavily on a few customers, which exposes the company to business risk.

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