NMDC is in a sweet spot and is expected to benefit from sustained high domestic iron ore prices as a supply deficit in the domestic market is likely to remain until FY2023 (ramp-up of production at the Odisha mines would take time) and sustained elevated international iron ore prices >$110-120/tonne over FY2022E-FY2023E (high demand from China and lower production guidance by Vale). NMDC share price today is Rs 135.5, down Rs 1`or 0.7%.

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Additionally, NMDC would witness a meaningful ramp-up in iron ore production volume over FY2022E-FY2023E led by resumption of production at Donimalai mine (capacity of 7 mtpa) in Karnataka and capacity expansion at Kumarasamy/ Chhattisgarh mines. Sharekhan thus expects NMDC’s iron ore sales volume to grow strongly by 30%/7% y-o-y to 43 mt/46 mt in FY22E/FY23E. Robust pricing environment and volume growth would largely negate the likely negative impact of higher royalty demand (royalty premium of 22.5%) from the Karnataka state government.

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Potential value unlocking from strategic sale of the 3-mtpa Nagarnar Steel Plant (CWIP of Rs. 16,500 crore or Rs. 54/share), which is not fully factored in into the consensus valuation, could add Rs. 22-25/share to NMDC’s valuation. Valuation of 3.7x FY2023E EV/EBITDA (excluding value of CWIP at 0.6x for steel plant) seems attractive as compared to average of 6.3x FY23E EV/EBITDA for global mining companies given NMDC’s decent return ratios (RoE/RoCE of 15%).

Moreover, Sharekhan expects NMDC’s dividend payout (DPS of Rs. 5-6 historically) could improve considerably post the likely strategic sale of the steel plant given a potential higher cash position and steady EBITDA outlook (Rs 6500 cr - 7000 cr) for the core iron ore mining business. Hence, Sharekhan re-initiates coverage on NMDC with a Buy rating and price target of Rs 165 (Rs 133/share for the core iron ore mining business and Rs 32/share for steel plant valued at 0.6x CWIP of Rs. 16500 cr).