Earnings likely to remain under pressure going forward; ‘Hold’ maintained
NMDC’s FY19 sales volume at 32.4mt (down 10% y-o-y) surpassed our 6% estimate. Key highlights: (i) Karnataka production & sales volume dipped owing to production halt at Donimalai from November, 2018; (ii) Chhattisgarh reported stable volumes compared to last year; and (iii) exports fell to the lowest level since FY16. Going ahead, we expect volume challenges to persist owing to ongoing production halt at Donimalai despite ramp-up expected in existing mines at Chhattisgarh and new deposits in JV with CMDC. Maintain Hold with TP of `100 (exit multiple of 5.6x September 2020 Ebitda).
FY19 volume declines: NMDC’s FY19 sales volume hit the lowest level since FY16 primarily due to production halt at Donimalai. Chhattisgarh production and sales volume were broadly static at 23.3mt and 23.4mt, respectively. Though NMDC ramped up volumes in Q4FY19 aided by destocking in Karnataka, we see challenges going ahead due to sustained production halt at Donimalai.
Earnings likely to drag but margins could surprise: Going ahead, we believe, earnings are likely to remain under pressure owing to muted volume growth and price pressure from Odisha-based miners. Nevertheless, margin could be better as sales in Chhattisgarh increase as these typically fetch better margin compared to Karnataka volumes and exports.
Outlook: Volume concerns remain— We are concerned on NMDC’s volume growth potential owing to production halt at Donimalai. Over the past three months, the stock has underperformed global peers as well as iron ore prices .We maintain ‘HOLD/SP’. At CMP, the stock is currently trading at 5.6x FY21e Ebitda.