Institutional Equities

NMDC
14 October 2013 Reuters: NMDC.BO; Bloomberg: NMDC IN

Likely to Achieve FY14 Volume Guidance; Up TP, Retain Buy

We organised a conference call with Mr S. K. Das, director-commercial, NMDC, to discuss the iron ore demand scenario and pricing outlook. Mr Das said NMDC remains certain of attaining its 30mt FY14 volume guidance, despite a Rs100/tn hike in the prices of lumps and fines at Rs4,300/tn and Rs2,610/tn, respectively. We have revised our EBITDA estimates upward by 12%/10% for FY14/FY15, respectively, driven by improvement in volume and realisation. Consequently, we have revised our TP upwards by 7% - from Rs147 to Rs158 - driven by earnings upgrade and revision in the multiple from 4.5x FY15E EV/EBITDA to 4.8x FY15E EV/EBITDA. Our target price is 21% above the CMP and therefore we have retained our Buy rating on NMDC. Following are the other highlights: Price hike after a span of one year: NMDC increased its prices after a span of one year because of steel prices strengthening in the domestic market. However, the management indicated that as steel prices have started softening, by way of discounts, NMDC increased the prices of lumps and fines by only Rs100/tn each. The management believes this hike is sustainable in nature. Production despatch update: NMDC sold 13.75mt of iron ore in 1HFY14, comprising 4.42mt from Donimalai mine, Karnataka, and 9.33mt from Bailadila mine, Chhattisgarh. The management indicated that NMDC is very much on track to achieve its 30mt offtake target for FY14. Production is likely to be lower versus despatches in 2QFY14 as heavy rains hurt production during the quarter. However, NMDC normally keeps an inventory of around 2mt, which is believed to have been partially offloaded in 2QFY14. Rake availability improving: The management stated it has fair visibility of NMDC obtaining 16-17 rakes/day in the Bailadila region in FY14 as compared to 11.8 rakes/day in FY13. Higher rake availability is the primary reason behind the companys confidence on its 30mt FY14 off-take target without the support of a slurry pipeline. NMDCs uniflow system and in-motion weigh bridge have started showing positive results. The management also sounded confident of NMDC obtaining 20 rakes/day in FY15E. As much as 80% of rail despatches are through the Kothavalasa Kirandul (KK) rail line and the company is getting good support from the Indian Railways. Reserve accretion likely at Donimalai mine: NMDC currently has 25mt of iron ore reserves at Donimalai mine, which as per the CECs (Central Empowered Committee) recommendation, results in 1.25mt production limit per annum. However, the company believes that it can add 80mt-90mt reserves through organic exploration and therefore it has submitted a revised mining plan to the Indian Bureau of Mines (IBM) for its approval. Post approval, NMDC would have 5mt production limit for the Donimalai mine and it expects around 5mt production from the Kumaraswamy mine. Lump exports at just 30,000tn-40,000tn in 2QFY14: NMDC primarily focuses on export of fines, as the export of lumps leads to higher losses compared to export of fines. NMDC indicated that it exported only 30,000tn-40,000tn of lumps in 2QFY14 compared to 140,000tn in 1QFY14. The companys realisation stood at Rs2,000/tn in case of fines in 2QFY14 compared to Rs2,510/tn in the domestic market.
Y/E March (Rsmn) FY11 FY12 Revenue 113,689 112,615 YoY (%) 82.2 (0.9) EBITDA 86,465 89,281 EBITDA (%) 76.1 79.3 PAT 65,005 72,654 EPS (Rs) 16.4 18.3 YoY (%) 88.6 11.7 RoE (%) 33.8 29.8 RoCE (%) 33.8 29.8 P/E (x) 7.9 7.1 EV/EBITDA (x) 4.0 3.5 Source: Company, Nirmal Bang Institutional Equities Research FY13 107,043 (4.9) 73,780 68.9 63,424 16.0 (12.7) 23.1 23.1 8.1 4.1 FY14E 118,638 10.8 73,359 61.8 61,484 15.5 (3.1) 20.2 20.2 8.4 4.3 FY15E 122,011 2.8 74,318 60.9 61,354 15.5 (0.2) 18.4 18.4 8.4 4.5

BUY
Sector: Mining CMP: Rs130 Target Price: Rs158 Upside: 21%
Giriraj Daga giriraj.daga@nirmalbang.com +91-22-3926 8168 Sumit Singhania sumit.s@nirmalbang.com +91-22-3926 8111
Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) 3,964.7 515.6/8.4 192/93 3,422,582

Conference Call Update

One Year Indexed Stock Performance

120 110

100 90
80

70 60
50 40

30 Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

NMDC LTD

NSE CNX NIFTY INDEX

Price Performance (%) 1M NMDC Nifty Index Source: Bloomberg 4.2 4.5 6M 3.7 10.6 1 Yr (31.1) 7.7

Please refer to the disclaimer towards the end of the document.

Institutional Equities
Orissa market update Iron ore export booking has started to decelerate following an ~12% appreciation of the Indian rupee against the US dollar in the past one month. However, the management does not foresee any price cut by players in Orissa. It indicated that all players in Orissa cut iron ore prices by Rs300-Rs400/tn for August 2013, while only three players i.e. Rungta, Essel Mining and Sirajuddin increased their prices by Rs200/tn each at the beginning of September 2013. Considering this environment, NMDC took a decision to hike prices by Rs100/tn, which is likely to sustain. Essar Steels CDR not a major threat NMDCs management doesnt foresee a downside risk to the iron ore volume from Essar Steel , which is undergoing CDR (Corporate Debt Restructuring). Essar Steel would prefer to export pellets from its Vizag pellet unit, in case it faces the prospect of low capacity utilisation at its steel plant in Hazira, Gujarat. Product mix stable Lumps and fines proportion in overall volume was stable in 2QFY14 at 36% and 64% respectively. However, the proportion of lumps is believed to be below 36% in Karnataka due to lower off-take. Change in our earnings estimates We have changed our earnings estimates after revising our volume and realisation estimates. We have revised our volume estimates upward by 7% for FY14/FY15 each after a strong outlook from the management. We have also revised our realisation estimates upward after factoring in the recent price hike and our revised rupee-US dollar assumption. The improvement in realisation looks steep as we had estimated lower prices in 2HFY14, while the company announced a price hike for the same period. We have factored in higher costs because of the incorporation of SPVs (special purpose vehicle) contribution in Karnataka to the tune of 10% of revenue. We have also incorporated the recent annual report numbers, which led to reduction in other income because of higher working capital deployment. Therefore, despite strong EBITDA performance, our PAT estimates stand revised only marginally upward for FY14/FY15. Exhibit 1: Change in our earnings estimates
Description Operational details Iron ore volume (mt) Realisation (Rs/tn) Realisation (US$/tn) Financials (Rsmn) Net sales EBITDA PAT 98,321 65,694 59,745 102,391 67,614 61,252 118,638 73,359 61,484 122,011 74,318 61,354 20.7 11.7 2.9 19.2 9.9 0.2 28.0 3,489 59.6 30.0 3,392 60.0 30.0 3,902 64.5 32.0 3,764 63.2 7.2 11.8 8.1 6.7 11.0 5.2 Earlier assumptions FY14E FY15E New assumptions FY14E FY15E Change (%) FY14E FY15E

Source: Company, Nirmal Bang Institutional Equities Research

Rating track
Date 24 June 2011 1 August 2011 8 August 2011 9 January 2012 29 May 2012 10 July 2012 22 August 2012 4 October 2012 8 November 2012 12 December 2012 26 February 2013 30 May 2013 4 July 2013 14 October 2013 Rating Sell Sell Sell Sell Hold Hold Buy Hold Hold Buy Buy Buy Buy Buy Market price (Rs) 252 245 247 172 168 194 181 194 182 147 143 117 100 130 Target price (Rs) 208 196 222 154 171 206 215 215 197 192 194 164 147 158

NMDC

Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15% HOLD 0-15% SELL < 0%
This report is published by Nirmal Bangs Institutional Equities Research desk. Nirmal Bang has other business units with ind ependent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication.

Access our reports on Bloomberg Type NBIE <GO>

Team Details:
Name Rahul Arora Hemindra Hazari Sales and Dealing: Neha Grover Ravi Jagtiani Pradeep Kasat Michael Pillai Umesh Bharadia AVP Sales Dealing Desk Dealing Desk Dealing Desk Dealing Desk neha.grover@nirmalbang.com ravi.jagtiani@nirmalbang.com pradeep.kasat@nirmalbang.com michael.pillai@nirmalbang.com umesh.bharadia@nirmalbang.com +91 22 3926 8093 +91 22 3926 8230, +91 22 6636 8833 +91 22 3926 8100/8101, +91 22 6636 8831 +91 22 3926 8102/8103, +91 22 6636 8830 +91-22-39268226 CEO Head of Research Email Id rahul.arora@nirmalbang.com hemindra.hazari@nirmalbang.com Direct Line +91 22 3926 8098 / 99
+91 22 3926 8017 / 18

Nirmal Bang Equities Pvt. Ltd.

Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai-400013. Board No. : 91 22 3926 8000/1 Fax. : 022 3926 8010

NMDC