NMDC has cut iron ore prices, too aggressively, ~40% in the past three months post increase in export duty, to export parity level. We believe domestic prices have bottomed out and should recover with demand from 2HFY23E. We see limited downside to seaborne prices as well, despite weak demand in China, due to cost support. The steel plant demerger and listing are likely to conclude in Q3FY23E and should unlock some value. We raise earnings and Fair Value to Rs 140 factoring recovery in prices and higher value to steel plant. Upgrade to ADD.
Domestic prices are trading at export parity
NMDC has cut iron ore prices by 40% in 1HFY23 mainly led by increase in export duty to 50% from 30% in May 2022. NMDC’s fine prices are now at 34% discount to import parity versus historic average of 20% and close to export parity prices. We believe iron ore prices have bottomed out and have upside risk led by (i) recovery in domestic demand allowing miners to raise prices to a premium to export parity, (ii) upside in seaborne iron ore prices and (iii) potential rollback of increase in export duty to 50% (from 30%).
Steel plant demerger
NMDC’s 3 mtpa steel plant is gradually progressing towards commissioning with coke pushing expected to complete in September 2022. We expect liquid steel production in December 2022 and plant commissioning in Q4FY23E. For the demerger, the Ministry of Corporate Affairs (MCA) hearing is concluded and approval is expected soon. We expect the demerger and separate listing to conclude by the end of CY2022. We increase the value of the steel plant to Rs 35/share (0.5X book) from Rs 25/share (0.35X book) in our SoTP, factoring the recent progress.
Seaborne prices to see cost support
Seaborne iron ore prices have been range-bound, $95-110/ton, in the past two months after a 30% correction in Q1FY23. We estimate that the current 90th percentile cost is ~$90/ton as the cost curve has got elevated due to high labour costs in Australia, export duty in India and higher energy prices globally.
Increase earnings and Fair Value to Rs 140/share (from Rs 115)
We have increased NMDC’s EPS to Rs 17.1/14.9/12.3 factoring ~5% premium to export parity and reduced capex from FY2024-25e assuming deconsolidation of steel plant. Rollback of the recent increase in export duty on iron ore would add further upside to our earnings and Fair Value. The stock trades at attractive 3.8X EV/Ebitda or 6.2X PER on FY2024E ex-steel plant; we upgrade our rating to ADD.