The state-run iron ore miner NMDC has been rated as ‘buy’ by HDFC Securities with an upside of over 27% to Rs 168 from its current market price of Rs 132. The stock of PSU mining company — NMDC — had returned as much as 8.83% to Rs 133.1 in the last week is HDFC Securities’ pick of the week. NMDC is Government of India enterprise engaged in mining of iron ore. Its projects under construction include 1.2 million tons per annum (MTPA) Pellet Plant at Donimalai, 3.0 million tons per annum (MTPA) Integrated Steel Plant in Chhattisgarh and several other projects.
- Diversification: Integrated Steel plant: NMDC is setting up 3 MT steel plant, at Nagarnar near Jagdalpur in Bastar District of Chhattisgarh with an estimated capex of Rs 200 billion. The capacity is expected to come on stream by December of FY18. The company has already incurred nearly Rs 140 billion till now and will be spending balance in the next quarters.
- Full or partial stake in steel plant may happen; A big positive: RoE (return on equity) for steel projects is likely to be much below and hence it is not an attractive investment avenue. Management has indicated that they are actively pursuing the sale of this asset and the same is likely to happen by end of FY18. The company expects to garner at least 1x invested capital from this sale.
- Iron Ore Mining expansion: As an addition to present Donimalai Iron Ore Mine and augmenting production Capacity, the construction of Kumaraswamy Iron Ore Mine with a capacity of 7.0 MTPA is being taken up with an estimated capital outlay of Rs. 898 crore.
- 1.2 MTPA Pellet Plant at Donimalai: One of the main objectives of this project is to prolong the life of the Tailing Dam at Donimalai by using slimes for making pellets. The estimated capital expenditure is Rs.572 crore. The company has completed this project during FY17.
- A sharp jump in estimated capex of 3 MTPA steel plant: On the back of expansion plans in Iron Ore mines and capex of nearly Rs 200 billion (initial capex guidance was Rs 150 billion; spent nearly Rs 140 billion already till June 2017) in setting up 3 MTPA steel plant in Chhattisgarh. The management guides steel plant to start commissioning by Mar 2018. The full benefit of this plant may accrue from FY20 onwards.
HDFC Securities said that any restriction imposed by the government on iron ore pricing will be detrimental to the prospects of the company.
- Higher payout not sustainable: NMDC’s dividend payout ratio has increased substantially to ~140% in FY16 from 25% in FY10, due to the limited capex requirement and high cash on its books. We have assumed dividend of Rs 5.7 and Rs 6.5/share for FY18E & FY19E, down from Rs 11 in FY16.
- Volume growth disappointment: NMDC has aligned prices with global benchmarks, but with the lag effect. If NMDC doesn’t price its product competitively, there is a risk to our volume assumptions. Secondly, the company also faces key challenges in terms of logistics, statutory clearance.
HDFC Securities has recommended investors to ‘buy’ NMDC at Rs 132 and add on declines to Rs 117 with Target Price of Rs 168. We expect revenue to record 13.2% CAGR over FY17-FY19E, driven by a combination of both higher sales volume and improvement in iron ore realisation, HDFC Securities said in a report. Based upon 8.5x FY19E EV/EBITDA and 14x PE we have arrived at the target price of Rs 168, HDFC Securities added. Export volumes are likely to increase to 2.9 MT and 3.4 MT in FY18E and FY19E as against 1.25 MT in FY16. We expect EBITDA to post 22% CAGR during the same period. Given the higher dividend payout in the previous years coupled with capex on steel plants in the coming years, we expect cash reserves to come down, resulting in a decline in other income. However, the strong operating margin would lead to 23% cagr in PAT during FY17-FY19E.