Buy NMDC shares on strong valuation: Citi group

Updated: Oct 26 2013, 16:10pm hrs
NMDCs second quarter PAT fell 21% y-o-y to R1,310 crore (Citi estimate R1,290 crore). Strong volume growth was offset by lower pricing and higher costs, export duty and freight on exports and contribution to the Karnataka SPV (10% of sales proceeds from Karnataka, R59 crore). Other income fell 8% y-o-y to R540 crore.

Provisional data suggest NMDCs production (6mt) and sales (6.5mt) both rose 11% y-o-y. Strong demand in Karnataka (13%) and a surge in exports (0.7mt, 90%) drove sales growth, while domestic Chhattisgarh volumes were muted (1% y-o-y). We await details on rake availability, fines/lumps mix. We predict FY14 sales at 29mt, a growth of 10% y-o-y (H1 sales 13.8mt, a growth of 8% y-o-y) against NMDCs expectation of 30-32mt. A 1% change in volumes would affect PAT by 1%.

NMDCs domestic fines prices were down 17% y-o-y to R2,510/t and lumps down 31% to R4,270/t in Q2; prices declined sequentially 4-7%. NMDC has been assessing demand sustainability to take pricing decisions. It announced price hikes of 2.4-4% on October 13 month-on-month. Fines are now priced at R2,610/t ($42 against export parity at $34) and lumps at R4,300/t ($70). A 1% change in prices would hit PAT by 1%.

Cash as of September 13 was R2,250 crore ($3.7bn) against R2,100 crore as of March 13. NMDCs board has approved an interim dividend of R3/share (Citis FY14 est R7/share). Management indicated (in September 13) a dividend payout of at least 50% and the potential for buyback/special dividend.