High earnings forecast to boost NMDC, says Macquarie

Posted online: Saturday, Mar 15, 2014 at 0000 hrs
We reiterate our ‘outperform’ rating on NMDC and raise our target price to R188 per share (earlier R176), valuing the share at 10x September 2016e. At 7x P/E, 3.4x EV/ebitda at 8% dividend yield on FY15e, we believe NMDC is looking cheaper than most peers.

NMDC clocked all-time record sales in February 14, up 32% y-o-y, with volumes up 17% y-o-y in eleven months of FY14. Restart of the slurry pipeline and commissioning of a new mining capacity should drive a 12% volume CAGR over FY13-16e. Further, we note a strong pricing outlook as domestic iron ore balance moves in favour of miners.

After 6 years of stagnant volumes, NMDC has surprised all estimates with 17% y-o-y volume growth in eleven months of FY14e and 32% y-o-y growth in February 14. NMDC is increasing its mining capacity from 34 mtpa to 48 mtpa by FY16.

Of this, a 7 mtpa mine (Mine 11B) is ready for commissioning in FY15 and NMDC has 2 mt of iron ore inventory. We raise our sales volume forecast 6-7% to 34 mt and 37 mt for FY15-16e but still think risks are to the upside. A 1-mt rise in volume impacts EPS by 3%.

Within two months of restarting, the 8-mtpa slurry pipeline has seen impressive ramp-up to run-rate of 7.3 mntpa. NMDC can easily beat our consensus volume estimate of 37 mt in FY16. Despite a 20% fall in global iron ore prices, Indian prices are up 8% in the last four months.