25 April 2016
Update
| Sector:
Metals
NMDC
Sell
BSE SENSEX
25,679
S&P CNX
7,855
CMP: INR99
TP: INR90 (-9%)
Pricing power improves on surge in global iron ore prices
But domestic supply can be a party pooper; revise TP to INR90
Global iron ore price outlook has improved
Iron ore prices have surged by ~73% from their lows in December 2015, driven by
NMDC IN
strong Chinese steel market and toning down of iron ore supply growth guidance
3,964.7
by BHP, Rio Tinto and Vale. Appreciation of AUD and BRL against USD puts
137/75
inflationary pressure on the cost structure of iron ore mines in Australia and Brazil
-5/6/-17
that comprise over 90% of seaborne supply.
392.5
5.9
236
20.0
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INR m)
Free float (%)
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Sales
66.8 68.3 67.3
EBITDA
35.5 38.6 36.0
Adj. PAT
33.8 34.3 30.5
Adj. EPS (INR)
8.5
8.6
7.7
EPS Gr(%)
-48.6
1.2 -11.0
BV/Sh. (INR)
79.0 82.9 85.9
RoE (%)
15.7 10.6
9.7
RoCE (%)
15.6 10.6
9.6
P/E (x)
11.5 11.4 12.8
P/BV
1.2
1.2
1.1
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-15 Sep-15 Dec-14
80.0
13.6
4.0
2.4
80.0
13.0
3.6
3.5
80.0
11.2
6.2
2.6
NMDC’s pricing power too has improved
Taking clues from the international market, NMDC has also increased prices in
March/April by 17-19% (or INR300/ton). At current global iron ore price (cfr China)
of ~USD65/dmt, we believe there is further headroom for NMDC to increase prices.
The landed prices of iron ore fines are at 6% discount to imports for a consumer
like JSW Dolvi - farthest customer from NMDC’s mines at the western coast of
India. This implies that NMDC can increase prices by ~INR350/ton as long as iron
ore prices remain above USD65/dmt. Although prices in global trade are higher,
exports from Chhattisgarh (at 30% export duty) are still unviable. NMDC can sell
under the MoU route (concessional export duty of 10%), but the volumes there are
not scalable.
Domestic supply can be party pooper
Although NMDC has raised prices, domestic private miners have not been able to
increase prices similarly and can put NMDC’s realization/volumes at risk. Prices of
iron ore in Odisha have remained virtually unchanged despite the huge 73% jump
in seaborne trade prices. Overcapacity and lack of export viability (because of 30%
export duty on high grade ore) are key reasons behind subdued domestic pricing.
There has been a huge jump in iron ore mining capacity after amendment of
MMDRA in January 2015. The leases of all merchant mines will expire by March
2020, which has put pressure on them to maximize volumes. Further, Essar Steel
has recently secured a lease in auction in Odisha. Jindal Steel has got a favorable
decision, allowing it to lift 10-12mt of inventories from Sarda Mines. Demand from
Essar and Jindal Steel has declined.
Raising FY17 realization estimate by 23%; target price to INR90
We are increasing our estimate for NMDC’s domestic iron ore realization by 23% to
INR2,213/wmt for FY17 to reflect latest prices. We are expecting volumes to
increase by 7% to 30.9mt in FY17. Resultantly, EBITDA has increased by 38% to
INR38.5b. We have raised our target price from INR78/share to INR90/share.
Maintain
Sell.
FII Includes depository receipts
Stock Performance (1-year)
NMDC
Sensex - Rebased
150
130
110
90
70
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.