Maintain outperform on NMDC, target Rs 238

Updated: Nov 9 2012, 08:24am hrs
We maintain our outperform rating on NMDC on expectations of increase in volumes and timely completion of mine expansion. Our 12-month price target is Rs 238 based on the DCF methodology, as NMDC is trading at an 9x P/E on FY14e, which is in line with global peers, but it sells at a steep discount to the market price and has much lower commodity price risk.

NMDC is the best play on growing shortage of iron ore in India and its move to monthly set in pricing is a good step. With more than 35% of the market cap as cash on books, it looks very attractive to us.

However, we cut our earnings by 7%, 7%, and 5% for FY13e, FY14e, FY15e, respectively. NMDC reported Q2FY13 net profit of R1,680 crore, down 6% from our estimate and 10% below consensus at R1,860 crore as volumes were impacted by monsoon.

Net sales at R2,600 crore was down 15% y-o-y, driven by 23% lower volumes of 0.59 crore tonne affected by monsoon. Ebitda at R1,940 crore was down 21%, as high operational leverage resulted in 39%y-o-y increase in cost/t.

Further, higher export volume (6%) resulted in 3.6x increase in freight costs. Given the miss and regular disappointment, we have cut our volume estimates by 6-8% for FY13-15e, resulting in an EPS cut of 5-7%.

We believe volumes to be strong in H2FY13. NMDC has achieved 1.27 crore tonne in H1FY13, annualising at 2.54 crore tonne. However, we expect H2 to be stronger and NMDC to end FY13 with a flat y-o-y volume of 2.7 crore tonne (versus previous estimate of 2.98 crore tonne). The increase in volumes and timely mine expansion hold the key.

Despite recent modest cuts of 6% in contract prices, NMDC contract prices are 11% higher since the start of FY13, whereas international prices have corrected 20% since April 2012.

NMDC will now revise contract prices monthly instead of quarterly. This will assist their efforts to break away from export parity prices and narrow the discount to international prices. We also believe FY13 numbers are achievable. In H1FY13, NMDC has achieved 48% of our FY13e full-year EPS, which is marginally (3%) below consensus. With H2FY13 expected to be stronger, we believe FY13 earnings estimates are achievable.