We upgrade NMDC to buy from neutral with a target price of R120 based on DCF to better capture the companys asset valuation. Our target price implies Q2FY15e multiple of 8x (global peers at 6-10x). While NMDCs higher margins, rich ore, domestic exposure and a cash-rich balance sheet may warrant a premium to global peers, pricing uncertainty perhaps offsets these advantages.
We have modeled DCF cash flows out to FY37 based on NMDCs existing reserves and resources of ~936 mt excluding Bailadila Deposit 13 and Deposit 4 (NMDC-CMDC JV). We do not account for any terminal value due to lack of visibility on future reserves. We cut PAT by 11% and 10% for FY14 and FY15 as we incorporate trends so far, lower prices and rise in costs payment of 10% of the Karnataka sales proceeds to the SPV (SC order).
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.
While its hard to ascertain NMDCs future pricing as it does not price at export parity, we take a conservative view. Indias steel demand is down 1% y-o-y (April-May13).
Global ore prices have fallen from $135 per tonne in April 2013 to $115 per tonne. NMDCs prices are unchanged (fines $44 per tonne and lumps $77 per tonne). We see 2% volume CAGR over FY12-15 despite NMDCs plans to raise capacity from 32-48 mtpa by 2015.