8 November 2012
2QFY13 Results Update | Sector: Metals
NMDC
BSE SENSEX
S&P CNX
18,902
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,760
NMDC IN
3,964.7
255/136
-4/-4/-29
721.6
13.4
CMP: INR182
TP: INR217
Buy
Consolidated
Volume decline impacts net sales, PAT:
Net sales declined 8% QoQ to INR26.1b, as volumes declined 14% QoQ
to 5.85m tons. Adjusted PAT declined 12% QoQ to INR16.8b, 8% below our estimate, as stronger prices eroded
demand, and thereby margins.
EBITDA 13% below estimate:
EBITDA was INR19.3b, as volumes fell short of our expectation by 2% and EBITDA/
ton was 11% below our expectation. In absolute terms, EBITDA/ton shrank 2% QoQ to INR3,307.
Volumes impacted by higher prices:
Average realization increased 5% QoQ as a result of price hike of 8% on
fines and 12% on lumps. However, NMDC's dispatches were impacted by erosion of price-sensitive demand.
The percentage of lumps in the product mix declined to 32% (-3% QoQ) in 2QFY13, due to high prices.
Exported 375kt of iron ore:
NMDC exported 375k tons of iron ore to a Japanese customer under long-term
pricing, with average export realization of USD130/ton FOB Vizag where margins were lower.
Expect average realization to remain resilient:
Though we remain bearish on international iron ore prices, we
maintain that the pricing gap between fines and lumps will narrow, as more pelletization capacities get
commissioned over the next 12-18 months. The mining ban in Goa and Karnataka, and increased restrictions in
Odisha will drive demand for NMDC products. We expect NMDC's average realization to remain resilient.
Cutting estimates for FY13/FY14:
We are cutting our volume estimates by 2m-3m tons to factor in the 3-5
months delay in 11B and Kumarswamy expansions. NMDC has announced its second price cut in 3QFY13,
following which we cut our average realization estimates by 8-9%. Correspondingly, our earnings estimates
have been cut 11% for FY13 and 16% for FY14.
Stock re-rating likely; maintain Buy:
NMDC has doubled its first interim dividend for FY13 to INR2/share.
Higher dividend payout is likely to re-rate the stock, in our view. The stock is trading at 8.7x FY14E EPS and at
an EV of 5x FY14E EBITDA. Maintain
Buy.
Sanjay Jain
(SanjayJain@MotilalOswal.com); +9122 3982 5412/
Pavas Pethia
(Pavas.Pethia@MotilalOswal.com); +9122 3982 5413
Investors are advised to refer through disclosures made at the end of the Research Report.
1

NMDC
Volumes impacted by untimely price hike; premiums, margins shrink
Net sales declined 8% QoQ to INR26.1b, as volumes declined 14% QoQ to 5.85m
tons. Average realization increased 5% QoQ as a result of price hike of 8% on fines
and 12% on lumps.
Since the international spot market had weakened significantly during the quarter,
NMDC's dispatches were impacted by erosion of price-sensitive demand. Some
customers on the western coast resorted to imports because international prices
were lower after the price hike by NMDC. The percentage of lumps in the product
mix declined from 35% in 1QFY13 to 32% in 2QFY13, as lump offtake suffered
more due to high prices.
NMDC exported 375k tons of iron ore to a Japanese customer under long-term
pricing, with average export realization of USD130/ton FOB Vizag. Exports had
lower margins due to 30% export duty and high rail surcharge as compared to
domestic sales.
EBITDA was INR19.3b, 13% lower than our estimate, as volumes fell short of our
expectation by 2% and EBITDA/ton was 11% below our expectation. In absolute
terms, EBITDA/ton shrank 2% QoQ to INR3,307.
Projects behind schedule; cutting volume estimates
The expansion at 11B, Chhattisgarh is running five months behind schedule and is
now expected to be completed by March 2013.
The mechanization of Kumarswamy is running three months behind schedule and
is now expected to be completed by December 2013.
We are cutting our volume estimates by 2m tons to 26.7m tons for FY13 and by 3m
tons to 32m tons for FY14.
Second price cut announced in 3QFY13; cutting EPS estimates
NMDC has moved to monthly pricing to better reflect spot market dynamics. With
quarterly pricing, it had not been able to keep pace with the volatile international
iron ore and Indian steel markets.
NMDC had announced price cuts of 2% on lumps and 11% on fines in October. It
has announced further price cuts of 12% on lumps and 3% on fines in November.
We have cut our average realization estimates by 8-9%. Correspondingly, our
earnings estimates have been cut 11% for FY13 and 16% for FY14.
Interim dividend higher; expect re-rating
NMDC has doubled its first interim dividend for FY13 to INR2/share. For FY12,
NMDC had announced two interim dividends of INR1/share each and a final
dividend of INR2.5/share, totaling INR4.5/share. Higher dividend payout is likely
to re-rate the stock, in our view.
Though we remain bearish on international iron ore prices, we still maintain that
the pricing gap between fines and lumps will narrow, as more pelletization
capacities get commissioned over the next 12-18 months. The ban on mining ban
in Goa and Karnataka, and increased restrictions in Odisha will drive demand for
NMDC products. We expect NMDC's average realization to remain resilient.
The stock is trading at 8.7x FY14E EPS and at an EV of 5x FY14E EBITDA. Maintain
Buy.
8 November 2012
2

NMDC
NMDC: an investment profile
Company description
NMDC is India's largest iron ore producer, with a capacity
of 32mtpa. It produces ~27mtpa of iron ore from four
mining complexes in Chhattisgarh and Karnataka. In
addition to its iron ore operations, NMDC has a diamond
mine at Panna (Madhya Pradesh) and owns a 10.5MW
wind power plant in Karnataka. In July 2010, Sponge Iron
India, which has a small sponge iron capacity of 60ktpa,
was merged with NMDC. It is investing INR300b over the
next five years to expand its iron ore production to
50mtpa and forward integrate by setting up a 3mpta steel
plant in Chhattisgarh and 1.2mtpa pellet plant in
Karnataka.
Key investment risks
NMDC's Chhattisgarh operations are prone to
disruption on account of Naxal activity in the region.
Recent developments
NMDC has doubled its first interim dividend for FY13
to INR2/share.
Valuation and view
The stock is trading at 8.7x FY14E EPS and at an EV of
5x FY14E EBITDA. Maintain
Buy.
Sector view
Average iron ore prices have corrected 18% QoQ in
2QFY13. With demand for raw material in China
moderating, the downtrend in iron ore prices is
expected to continue. We are modeling average iron
ore prices (63.5% CFR China) of USD121/ton in FY13
and USD102/ton in FY14.
Though we remain bearish on international iron ore
prices, we still maintain that the pricing gap between
fines and lumps will narrow, as more pelletization
capacities get commissioned over the next 12-18
months. The ban on mining ban in Goa and
Karnataka, and increased restrictions in Odisha will
drive demand for NMDC products. We expect
NMDC's average realization to remain resilient.
Key investment arguments
While globally, the iron ore business is facing a
slowdown, strong domestic demand coupled with
constrained supply has improved fundamentals of
Indian iron ore miners like NMDC.
Investments in pelletization capacities in India will
lead to acceleration in demand (and therefore,
higher prices) for iron ore fines, which constitute
~65% of NMDC's product mix.
Unlike its global peers, NMDC's average iron ore
realization is resilient, helping to keep margins
stable.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
NMDC
10.2
8.7
2.5
2.1
4.4
3.7
6.0
5.0
SESA Goa
5.2
5.1
1.0
1.0
4.5
3.0
6.0
4.3
Jindal Steel
9.7
10.0
1.9
1.6
2.8
3.0
9.0
8.4
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
18.2
20.9
FY13
FY14
Consensus
Forecast
20.4
21.7
Variation
(%)
-10.6
-3.6
Target price and recommendation
Current
Price (INR)
182
Target
Price (INR)
217
Upside
(%)
19.3
Reco.
Buy
Basis: 6x FY14E EBITDA
Stock performance (1 year)
Shareholding pattern (%)
Sep-12
Promoter
Domestic Inst
Foreign
Others
8 November 2012
90.0
8.4
0.7
0.9
Jun-12
90.0
8.4
0.7
0.9
Sep-11
90.0
8.4
0.8
0.8
3

NMDC
Financials and Valuation
8 November 2012
4

NMDC
N O T E S
8 November 2012
5

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
NMDC
No
No
No
No
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Any business interaction pursuant to this report will have to be executed
within the provisions of this Chaperoning agreement.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco
Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
Motilal Oswal Securities Ltd
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com