Rating: buy; NMDC aims for sustained volume growth

Aims to boost mining capacity to 70-75 mt from current 50 mt

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India was one of the handful countries whose crude steel production saw an improvement of 5.5% y-o-y to 125mt in CY22.

NMDC, a large cap company operating in mining sector has attractive fundamental setups due to several factors. To begin with there is robust steel demand in India which will increase due to government’s focus on infra development. With the opening up of the China market, there is positive outlook for steel demand. Secondly, there is no export duty for NMDC, which allows the company to sell its products overseas at competitive prices.

Given these reasons, many steel players in India are adding capacity, which is expected to drive up demand for iron ore over the next few years. The removal of export duty on iron ore, pellet, and steel in Nov ’22 is already s howing positive signs and prices of iron ore have increased since then. Also, global iron ore prices have been rising, on the back of improving China demand. This, would benefit players such as NMDC to supply more in the domestic market as well as look to exports. NMDC has demerged its steel plant, which has now been listed separately. The overhang of the steel plant capex has been done away with, providing more comfort on the core iron ore business.

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The capacity expansion is on the cards for NMDC (50MT being increased to 70MT), which would support volumes ahead. Strong domestic demand, exports of iron ore and pellets would be the key demand drivers for NMDC. We reiterate our Buy rating on the stock with a target price of Rs 155 (5x EV/Ebitda). We believe NMDC is very well placed to capitalise on the growth opportunity ahead.

Robust domestic demand

India was one of the handful countries whose crude steel production saw an improvement of 5.5% y-o-y to 125mt in CY22. Most companies have guided for a robust volume growth in Q4FY23. India is all set to double its capacity with all major steel manufacturers undertaking robust capacity expansion to cater to the ever-rising domestic demand. The government’s strong push on infrastructure and construction, along with improved demand for auto, is expected to drive the demand for steel, which in turn, will simultaneously boost the demand for iron ore in India. Similarly, higher pellet exports too are expected to drive the demand for iron ore in India.

Roll back of export duty

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The government rolled back the export duty on steel, iron ore, and pellets in Nov ’22 after a gap of six months. Pellet exports are likely to pick up with the withdrawal of duty and since NMDC is the supplier to numerous pellet manufacturers, we expect it to benefit significantly from the same. Post opening up of the China market, prices in international markets have rallied over $120/t and NMDC is expected to export a small batch by the end of Mar’23. Currently, prices, which are hovering above $120/t, offers a viable option for the company to undertake exports.

NMDC has also undertaken a capex to set up a 2-mt pellet plant, which is expected to commence production at the end of CY24. This should enhance the product offering and margins for NMDC, going forward.

Set to enhance iron ore capacity

NMDC is undertaking numerous capex programs, which will eventually increase its mining capacity to 70-75mt from its current 50mt. NMDC is doubling its railway line capacity and the Jagdalpur line is 75% completed. The capex earmarked for undertaking this expansion stands atRs 20 bn for FY23and Rs 15-16 bn for FY24.

Q4 is a stronger quarter with pickup in heavy capex infrastructure and construction activities, which will lead to higher steel consumption, and consequently, drive up iron ore demand. With export of steel and pellets picking up pace and no drag from the steel business, we expect NMDC to continue its volume growth journey. We believe NMDC is well placed to capitalize on the growth opportunity ahead.

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First published on: 27-02-2023 at 02:00 IST
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