NMDC has fallen 25% in three months (global $ ore prices down 17%). The stock price seems to reflect one of two scenarios: (a) implied PE of 6.7x (global peers at 6-10x); or (b) earnings downgrade expectations. We think NMDC should trade at the global average (~8x) ? high margins, rich ore, domestic exposure, a cash-rich balance sheet may warrant a premium; pricing uncertainty offsets these benefits.
Asset value (20+ years? life, low costs) and dividend yield (~6%) suggest upside; even as we lower ore price estimates (-10% vs NMDC?s current prices). We upgrade the stock to a buy rating with a target price of R120. While it?s hard to ascertain NMDC?s future pricing as it does not price at export parity, we take a conservative view ? lower prices than earlier. India?s steel demand is down 1% y-o-y (Apr-May13).
Global ore prices have fallen from $135/t April 2013 to $115/t; NMDC?s prices are unchanged (fines $44/t, lumps $77/t). Global prices could be under pressure in 2HCY13 ? 30mt of low-cost production (seaborne 1.1bnt); China?s steel production may have peaked. FY14 estimate: NMDC?s fines prices $40/t ($43 earlier), lumps $71 ($77 earlier). PAT will rise by 1% if prices rise by 1%. We see 2% volume CAGR over FY12-15 (despite NMDC?s plans to raise capacity from 32 to 48mtpa by 2015). Also, NMDC is reasonably insulated from any changes in the royalty regime as it is charged directly to its customers in the domestic market.