NMDC reported higher than expected EBITDA at Rs 12 billion. The key surprise was on account of higher than expected volumes. Provisions on account of doubling of rail lines continue to reduce, while the company need not recognise service tax on royalty post implementation of GST. We expect Odisha iron ore production to drop to CY13-14 levels and will again move toward reducing the discount of Indian iron ore to international prices, a trend which was interrupted on account of strong ramp-up in domestic mining over the past two years. We reduce FY18 volumes to 36mnte from 37mnte earlier, while adjusting for the margins as witnessed in H1FY18. Given increasing clamour of dividend requirement for government, the company might be forced to surpass our expectations of dividend payout for FY18E. However, the provisions highlight that all effort are being made to reduce the dividend outgo. We roll over our valuations to FY20E and maintain BUY with a revised target of Rs 158/share.
EBITDA of Rs 12 billion implied a beat of Rs 1billion, mainly due to higher sales volume at 8.4 mnte. However we had to adjust for disruption in dispatches that NMDC continues to face in Q3FY18 on account of KK line. Hence Q3FY18 volumes have been revised downward to 8mnte and FY18 volumes have been reduced to 36mnte from 37mnte. Supreme Court has directed Odisha miners to pay Rs 170 billion of levies to resume mining. The same needs to be paid by December ’17. Our due diligence with many of the large and small miners highlight that given the mining leases were anyway expiring in FY20, it doesn’t make sense to pay the hefty fine and resume/restart mining. The extent of penalties on account of Forest violation has not yet come through. Majority of the Indian iron ore production increase has been driven by Odisha. Any disruption in the state can lead to production going back to FY15 levels, when NMDC’s pricing power was at its peak.
