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NMDC Limited (NMDC) is India’s largest producer of iron ore. Operating under the Ministry of Steel, NMDC is a ‘Navratna’ public sector enterprise and owns and operates highly mechanized iron ore mines in Chhattisgarh and Karnataka. NMDC is one of the low-cost producers of iron ore in the world. With iron-ore production of around 45.1 million tonnes (MT) in FY24, at an average of 64% Fe, NMDC sells one of the best grade Iron ore globally. We believe with the onset of key structural changes in the economy and a decade long investment cycle triggered largely by the government capex is expected to continue and in comparison to its international counterparts, the domestic steel sector stands in a favorable position. It is projected that the domestic crude steel capacity will hit around 175 MT in FY24, boasting an estimated capacity utilization rate of approximately 82%. This translates to an anticipated iron ore requirement of roughly 282 MT in FY24E with NMDC commanding a ~16% market share.

We Initiate coverage on NMDC based on the following factors: 1) NMDC stands to capitalize on rising steel demand as India’s steel industry doubles by 2030. 2) This PSE is poised to be a key beneficiary of a potential repeat of the 2003-2007 capex boom, given the resemblance of the current economic landscape to that of 2003-2008. 3) Aggressive mine capacity expansion to meet upcoming demand. 4) Abundant availability of high-quality ores for the next 40 years. We Initiate NMDC at 6.5x FY26E EV/EBITDA to arrive at a target price of ?297. Over FY24E-26E we expect NMDC to clock a Revenue/EBITDA/PAT CAGR of 12.9%/18.8%/19.1% respectively.

An attractive play on upcoming steel demand in India

The Indian steel industry is set to double by 2030, with major players like Tata Steel and SAIL expanding their capacities. NMDC, a significant iron ore producer, stands to benefit from this growth as companies without iron ore integration seek to meet rising demand. With India’s per capita steel consumption expected to double, the demand for iron ore is also projected to rise. As one of the top 10 global iron ore producers and the largest in India, NMDC is well-positioned to capitalize on this trend. Additionally, the government’s focus on infrastructure development is driving steel demand, further boosting NMDC’s prospects.

Bullish on the India’s capex story- A repeat of 2003-07 capex boom likely

Analysis of peak returns in India’s sectoral indices from 2003 to 2008 revealed that Capital Goods and Metals sectors outperformed traditional sectors like Banking and IT, attributed to an infrastructural boom. Similar trends are anticipated between 2023 and 2028, with early signs evident in 2024. The current economic landscape mirrors the period of 2003-2008, characterized by abundant liquidity, low inflation, declining NPAs, rising commodity prices, and active private investment in sectors such as steel, cement, and power. With the government’s focus on infrastructure development over the next five years, NMDC is expected to benefit directly from increased capital expenditure. Iron ore production has seen notable growth, with FY24 projected to surpass FY23’s record production. Government measures to boost iron ore production and availability include mining policy reforms, expediting mine auctions, improving ease of doing business, facilitating mining lease transfers, and incentivizing exploration activities.

Major Capacity additions on the cards

NMDC is undergoing significant capital expenditure (capex) projects aimed at enhancing its dispatch and sales capabilities, with a focus on bolstering ore production, improving product mix, and expanding mining capacities. Ambitious plans have been set to increase production capacity from 51.8 to 67 MT by FY26, and further to 100 MT by FY30, to meet growing demand in the Indian steel sector. Initiatives include the establishment of a 12 MT screening plant at Kirandul (Chhattisgarh), along with infrastructure enhancements at Bacheli (Chhattisgarh). Progress is underway for a 15 MT slurry pipeline and a 6 MT beneficiation plant, with capital expenditure budgets allocated for FY24 and FY25. Currently holding approximately 51 MT of Environment Clearance (EC) approvals, NMDC seeks to enhance capacities at Kirandul and Bacheli, with additional enhancements expected for the Kumaraswamy (Karnataka) mine. Applications for increased EC limits are pending approval, potentially raising the total EC to 56-60 MT. While incremental volume growth is anticipated in the coming years, expansion is expected to plateau post-FY26 until new capacities are operational. Plans are in place to enhance EC approvals at Kirandul and Bacheli over the next four to five years, paving the way for significant production increases, ultimately aiming for a total capacity of 100 MT.

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