Buy NMDC Ltd for the Target Rs.84 by Motilal Oswal Financial Services Ltd
Higher EC limit to drive volumes; prices expected to remain stable
* NMDC, the largest domestic iron ore producer, is planning to double its capacity from ~55mtpa to ~100mtpa over the next 4-5 years. With a strong domestic steel demand outlook, steel production is projected to reach 300mt by FY31, which will boost iron ore requirements to ~450-500mt. Hence, with a significant expansion plan, NMDC is well positioned to benefit from the upcoming opportunities.
* Historically, NMDC delivered a volume CAGR of 7.2/8.3% in the last 5/10 years. FY25 volume growth was flat YoY (~44.5mt), impacted by 45 days of production loss due to a strike at its mine (resolved by FY25 end). We expect an 11% CAGR in volume over FY26-27E on a low base.
* Global iron ore prices fell ~12% YoY to USD105/t in FY25, though domestic prices rose ~15% YoY to ~INR5,100/t, driven by strong domestic steel demand. While global iron ore prices could remain under pressure, India’s robust demand and rising steel production should keep domestic iron ore prices steady through FY26-27.
* 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 FY29-30.
* The company continues to operate with one of the lowest cost structures in the industry. EBITDA is expected to clock ~15-20% CAGR over FY26-27E, supported by volume ramp-up, operating leverage, and INR100-300/t in logistics cost savings via slurry pipelines and rail linkages. New screening and beneficiation units will further improve realizations by enabling valueadded ore sales.
Valuation and View
* NMDC is well placed with enhanced EC limits, which would lead to improved volumes going forward. With higher volumes and stable realizations, earnings momentum is expected to be robust.
* Additionally, NMDC has net cash of INR63b as of FY25 and is expected to generate ~INR190b of OCF over the next two years. This will support its capex plan without overleveraging. At CMP, the stock trades at 4.1x EV/EBITDA on FY27E. We reiterate our BUY rating on NMDC with a TP of INR84 (based on 4.5x EV/EBITDA on FY27E).
* Key risks – a) rising competition from captive iron ore mining, 2) Karnataka mineral tax demand, which could impact earnings if ruled against NMDC.
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