Taking cognisance of 8MFY19 volumes, we are trimming FY19E/FY20E volume by 3%/5%, which in turn reduces FY19E/FY20E Ebitda by 7%/9%.
As per the media reports, NMDC has cut notified prices for lumps and fines by 8% each for a second time in the past fortnight. We attribute this to: (1) a decline in spreads across the longs value chain, prompting price cuts by other miners in Karnataka and Odisha; and (2) a potential scramble to gain market share in the sponge iron market in Chhattisgarh.
On the volumes front, Chhattisgarh did well while Karnataka lagged owing to a production halt at Donimalai. Taking cognisance of 8MFY19 volumes, we are trimming FY19E/FY20E volume by 3%/5%, which in turn reduces FY19E/FY20E Ebitda by 7%/9%.
We are retaining price assumptions for FY19 and FY20, each 6% lower than the YTD price, and trimming exit EV/Ebitda multiple to 5.5x (from 6x) given uncertainties around Donimalai. Maintain ‘Buy’ with a TP of `130 (versus `151). We believe the decision to cut notified prices for lumps and fines by 8% each again in a fortnight was spurred by price cuts undertaken by other miners in Karnataka (7%) and Odisha (13%) in November.
Furthermore, iron ore prices came under pressure owing to price decline in the longs value chain. According to our estimates, the spread for pellet players sourcing iron ore from NMDC at current prices is higher than on procurements from Odisha and Karnataka.
In our view, this should arrest further price cuts unless international prices go down or domestic longs prices come under additional pressure. November sales volume of Chhattisgarh operations shot up 36% YoY to 2.1mt. However, the production halt at Donimalai dragged Karnataka volumes 37% y-o-y (33% m-o-m) to 0.7mt. In light of the continued production halt at Donimalai, we are revising down volume estimate by 3%/5% for FY19/FY20.
Despite our positive outlook on the stock, we expect continued production outage at Donimalai to overhang stock performance. Consequently, we are trimming FY19E/FY20E volume by 3%/5% and exit multiple to 5.5x (from 6x). The stock is trading at an inexpensive 3.8x FY20E Ebitda.