NMDC reported 40% y-o-y surge in sales volume to 3.6 mt for April 2017 led by higher sales to clients outside Chhattisgarh. However, international prices that have plunged in the recent past pose a threat to volumes as well as realisation. At CMP, the stock is trading at 6.5x FY19E Ebitda which is in line with global peers, but in the top quartile of its 7-month trading range. Maintain Hold with target price of Rs 130.
Sales volume strong in April
NMDC’s sales volume spiked 40% y-o-y to 3.6 mt, mainly led by high off-take by major clients outside Chhattisgarh. Procurement by major players from outside the state, such as JSW Steel and RINL, was up 27% MoM to 276 rakes. In April 2017, JSW Steel procured 3x higher rakes MoM (66 versus 21), while RINL sourced 163 rakes. However, off-take by Chhattisgarh based sponge units declined significantly in April 2017 versus March 2017. These units sourced 19 rakes in April 2017, as against 67 in March 2017 from NMDC. The company’s exports too suffered — exported only 45 rakes in April 2017 versus 74 rakes in March 2017 impacted by low parity in exports amidst sharp decline in global prices.
Headwinds likely on continued fall in global iron ore prices
In May 2017, NMDC rolled over its fines price for the second month in a row after 4 successive hikes from November 2016-March 2017. We believe, the company may find it difficult to further hike prices as import parity has declined to 17-months’ low. We believe, major customers along the West coast may find imports cheaper, which could exert pressure on volumes.
Outlook and valuations: Headwinds anticipated; maintain ‘HOLD’ on stock
We believe, the sharp fall in global iron ore prices is likely to pressurise volumes and realisations. At CMP, the stock trades at 6.5x FY19e Ebitda, which is in line with global peers, but at the higher end of its past 7-months’ trading range. We maintain ‘HOLD/SP’ with a target price of Rs 130.
NMDC is the largest iron ore producer in India by volume, and produced 30 mt (one-fifth of country’s production) of iron ore from four fully mechanised mining complexes in FY14. The company’s principal operations include its four iron ore mining complexes at Kirandul and Bacheli in Chhattisgarh and Donimalai and Kumarswamy in Karnataka. In FY13, 7.4 mt of iron ore was produced from the Kirandul mining complex, 11.6 mt from Bacheli and 8.2 mt from Donimalai. NMDC also operates a diamond mine at Panna (Madhya Pradesh).
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NMDC has rolled over its prices for the second month in a row post global iron ore prices slipping 33% in the last 2 months. Though offtake has been robust owing to production ramp-up by steel players, we see risk to further price increases in the event of Odisha miners not increasing prices/ramping up production or international iron ore continuing to stay low and fresh supply coming onboard in FY18. We maintain neutral outlook on the stock.