NMDC share price today: Sharekhan re-initiates coverage with a Buy rating and price target of Rs 165

NMDC has increased the lump-ore prices by 4.9% to Rs 5350 per tonne from Rs 5100 per tonne. Prices of fines have been increased by 2.4% to Rs 4310 per tonne from Rs 4210 per tonne. This is the second time when the prices have increased. The first change was announced on March 6, 2021. NMDC share price today is Rs 128, down Rs 5.3 or 4.1%.

 

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).

 

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.

 

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)