We upgrade NMDC to Buy with a revised target price of Rs 195 (12x FY20E EPS, 7x FY20E Ebitda as we expect: (i) favourable tailwinds to lend impetus to volume growth; (ii) the recent price hike of 19-22% to largely sustain; and (iii) the pellet and steel plants to further augment revenues. Accordingly, we raise our FY18/19e Ebitda by 9/31% and introduce FY20 estimates. Our TP of Rs 195 implies an exit multiple of 12x on FY20E EPS and 7x on FY20E Ebitda— which is at a discount with peers, and 28% upside from current levels.
Volume growth imminent
We see a conducive macro environment for volume growth as: (i) closure of five working mines in Odisha, due to failure to pay penalty as directed by the Supreme Court, will result in annual deficit of 20mt; (ii) in medium term, upcoming auction of private iron ore mines in FY20 will further constrain production (estimated at 67mt), especially in Odisha; and (iii) there’s possibility of better capacity utilisation at major customers — Essar Steel and RINL. On supply front, higher mining quota in Karnataka and screening infra in Chhattisgarh will help augment volume to meet demand.
Expect recent price hike to largely sustain
NMDC recently undertook a 19-22% price hike. Despite the discount to international prices being at lowest levels in past 3 years, we expect the price hikes to sustain as competition from Odisha-based miners is expected to ebb. Nevertheless, our FY19/20 price estimates build in a decline of `200/t from current levels, factoring in possible fall in global iron ore prices.
Outlook and valuations: Firmly on growth path; upgrade to ‘BUY’
We believe that NMDC stands to gain from higher volumes and prices amid favourable macros, translating into Ebitda CAGR of 19% through to FY20E. At CMP, the stock is trading at 9.5x FY20E EPS which is relatively lower in comparison to its global peers and 5-year trading average. We upgrade to ‘BUY/SO’ from ‘HOLD/SP’ with a revised target price of Rs 195 (Rs 125 earlier), implying an exit multiple of 12x FY20E EPS. Our TP also factors in probable dividend yield of 4-5% in each of the next 2 years.
Tailwinds to bolster volumes
We expect sales volume to grow at 8% CAGR through to FY20 to 44mt, driven by potentially lower production from Odisha as: (i) 20mt of annual production is expected to be hit by closure of 5 mines. and (ii) another 67mt capacity might be impacted due to auction of 16 non-captive mines. Supply will be hit in the interim, benefitting NMDC in Chhattisgarh.