An Equity Research Report on NMDC Ltd. by Action Financial Services.
Equity Research :: NMDC Ltd. March 06, 2013 BSE Code: 526371 NSE Code: NMDC Reuters Code: NMDC.BO Bloomberg Code: NMDC:INNMDC is Indias largest iron ore producer and exporter, with a capacity of Exhibit 1: Market Data32mtpa. It produces about 30mtpa of iron ore from 3 fully mechanized mines in Rating BUYChhattisgarh and Karnataka. The company has 40% market share in the iron ore CMP (`) 143producing industry on account of its high quality iron ore. Moreover, NMDC has Target Price (`) 175the only mechanized diamond mine in the country with a capacity of 0.1 million Potential Upside (%) 22.4carats/annum at Panna (Madhya Pradesh) and owns a 10.5MW wind power plant Duration Mid-Termin Karnataka. 52-week High-Low (`) 203/133Major Catalysts Rise from 52WL (%) 7.5 Correction from 52WH (%) 29.6 Subdued Q3FY‟13 performance Beta 1.2 1 Year Average Volume 1.7mnNMDC posted a dismal performance in Q3FY‟13 with 27.4% YoY decline in 3M- (12.6)turnover to `204.77 bn, mainly on account of 17% YoY fall in sales volume at Stock Return (%) 6M- (21.8)5.36 million tonne (mt). The company‟s production of iron ore registered a 9M- (14.4)decrease of 25% YoY. The low off-take of iron ore by customers and evacuation Market Cap (`bn) 567.9problem mainly from Bailadila project led to a 30% YoY decline in NMDC‟s Book Value (`bn) 61.6Q3FY‟13 net profit to `12.9 bn. Despite of subdued performance, themanagement of the company is confident that production will pick up in next Exhibit 2: Fiscal Year Endedquarter. Y/E March FY11 FY12 FY13E FY14E Net revenue (`bn) 113.7 112.6 114.9 132.1 Aims to ramp up its iron ore production capacity EBIDTA (`bn) 86.4 89.2 88.2 101.9 PAT (`bn) 65.0 72.7 74.6 85.6NMDC, which produces about 15% of the iron ore mined in India, registered a EPS (`) 16.4 18.3 18.8 21.6record 3.06 mt of production in January 2013, the highest monthly production in P/E (x) 8.7 7.8 7.6 6.6the history of the company with despatches at 2.7 mt. NMDC aims to expand its P/BV (x) 3.0 2.3 1.9 1.6production capacity from the current 32 mt to 48 mt by FY‟15E through increased EV/EBIDTA(x) 5.5 5.0 4.6 3.5exploration of its existing mines and development of new mines. ROCE (%) 44.0 35.8 29.1 27.7 ROE (%) 33.8 29.8 25.1 23.7 Cost efficiency to boost profitability Exhibit 3: Shareholding PatternNMDC is one of the lowest cost producers of Iron Ore in the world owing to its Dec12 Sep12 chghighly mechanized mines, high grade iron ore reserves with Fe content of more Promoters (%) 80.0 90.0 (10.0)than 64% and economical/inexpensive labour. Further, the company has the FII (%) 4.05 0.66 3.39access to efficient logistics, which saves the cost. In FY12, its average cost of DII (%) 11.63 8.42 3.21production stood at US$17/tonne vs US$24/tonne in FY11. The lower cost ofproduction shields the company from any adverse situation and helps the product Public & Others (%) 4.32 0.92 3.40to remain competitive even if iron‐ore prices drop significantly. Exhibit 4: One Year Relative Price PerformanceSetting up steel plants, pellet plants and beneficiation plants as a forwardintegration programme for value additionThe company intends to diversify its operations by moving downstream throughestablishing steel plants and pellet plants in order to accelerate demand for ironore fines, which constitute ~65% of NMDCs product mix. NMDC is moving up thevalue chain by setting up the 3mtpa steel plant at Nagarnar, Chhattisgarh at anestimated capex of `155 bn. Further, it is setting up a 2 pellet plants atDonimalai of 1.2mtpa and one at Bacheli of 2mtpa.
Equity Research :: NMDC Ltd. March 06, 2013 NMDC well placed to benefit from current mining scenario Exhibit 5: Region wise mining output of NMDCRobust demand of iron ore in the domestic markets (as against the slowdownin the global market) coupled with constrained supply is favorable for thecompany as it has high quality assets on account of best mining practices.Further, its assets in Karnataka have remained unharmed whereas privatemines were closed due to blanket mining ban imposed by the Supreme Courtin July 2011. Moreover, Supreme Court immediately granted all the necessaryapprovals to NMDC for meeting the deadline of producing 12mtpa fromBellary district. Also, it was unviable for steel manufacturers to procure ironore from other states due to logistical constraints, increasing theirdependence on NMDC.Made its first overseas venture through 50% acquisition in Legacy IronOre Exhibit 6: Iron ore sales & production trendNMDC has completed its first overseas acquisition for iron ore resources in 3000 0.25 (inmtpa)Australia. It acquired 50% stake in Legacy Iron Ore 23% (Legacy), a listed entity, fora consideration of `996.3 mn. The acquisition will aid the company in long 2500 0.2term mineral security for domestic industry. Legacy has six exploration stageprojects and has 11.18% stake in Hawthorn Resources Ltd, the registered 2000owner of Mt Bevan iron ore tenements having inferred resource of 1.59 billion0.15tonnes of magnetite iron ore at 30.2% Fe Tests which can be beneficiated to69-70% Fe with around 44% recovery. 1500 0.1 Series1 8% Series2 Debt free company with huge cash reserves 1000 0.05 2% 2%NMDC is a debt free company sitting on a huge cash pile of ~`225 bn cash 1% Exhibit 6: Sales Volume Trend (in mt) 500 0 0reserve at the end of FY12 which reflects on the company‟s balance sheet -2%strength. The company is also consistently paying dividend. In FY12, NMDCpaid dividend of 0 -0.05 `4.5/share, implying a payout ratio of 26.1%. The company Year FY05in FY06 FY07 FY08 FY09 FY10 FY11 10%will be well poised for re-rating future on higher dividend payout. Withstake sale, the free float of the company has increased to 20% and has thelargest market capitalization in the Indian metals and mining sector. Exhibit 8: Relative price chartExhibit 7: Relative Valuation Dividend P/E P/B Yield (%) Sesa Goa 8.4 1.1 2.5 NMDC 7.8 2.3 3.1 MOIL 9.8 1.7 2.1
Equity Research :: NMDC Ltd. March 06, 2013 Mining Industry Being a rich source of minerals, India is the worlds third largest producer of coal, fourth largest producer of iron ore and the fifth largest producer of bauxite. Iron ore reserves are estimated in the region of 23bnt (billion tonnes) and account for 6% of global reserves, while coal reserves are reported to be around 255bnt. Further, coal production is expected to grow at a CAGR of around 7.0% during FY12-14. In a recent report, the Indian Bureau of Mines (IBM) said that “almost all the major iron-ore belts - Orissa, Jharkhand, Chattisgarh, Maharasthra, Goa and Karnataka were exploited for high-grade ore at a cutoff of around 60% iron and many had been exploited for high- and medium-grade ores (62% plus) over the last six decades; but the country has huge potential in low- grade ores in these regions, however exploration efforts have been highly inadequate.” Besides, only 10.0% of the countrys landmass has been explored, due to significant regulatory and bureaucratic hurdles. However, the industry performance is anticipated to decelerate, with an expected CAGR of 12.5% for the five-year period i.e. 2011 - 2016, which is expected to drive the industry to a value of $255.8 bn by the end of 2016. Despite of the prevailing obstacles, the fast-rising domestic demand and favorable regulations such as FDI, Mines and Minerals Development & Regulation (MMDR) bill etc. would increase the competition and transparency among the market players which in turn encourage the Indian companies to venture into the sector and will also provide tailored solutions for the issues hampering the growth, without losing the operational efficiency.Rising demand provides opportunities to the sector to drive growthThe rising demand, exploration of unknown deposits, new discoveries, upgraded technologies and favorable government policies hasopened varied opportunities to the Indian mining industry and mend the demand curve for this sector on rising side. It is believed thatthe domestic steel capacity is likely to go up from current ~84 mtpa to ~110 mtpa, which in turn will help iron ore demand to remainrobust. The availability of iron ore is bound to fall in India and many steel players have started looking for imports, which definitely is acostlier proposition, these restrictions and strict regulations, we believe would be helpful in improving NMDC‟s pricing power for itsdomestic customers. Exhibit 9: Steel capacity growth in India (mt) Government reforms to help in improving sectors future growthspending to boost cement demand On the backdrop of fall in domestic iron ore production, India would have to import about 15 mt of iron-ore by the end of FY13 and this was to increase further in the coming years since most domestic steel companies were facing acute shortages of ore from private miners due to ban on illegal mining. To meet the target and to support the grounded sector, the management has taken various steps to boost the production and investment by calling for a sea change in the countrys mining industry. India, among the top ten mineral producing nations in the world has welcomed the judgment given by the Supreme Court to lift ban on iron ore mining operations in Karnataka for companies which have not flouted lease conditions. Moreover, the infusion of some new mining policies by the government such as competitive bidding for all natural resources, primarily coal blocks, new MMDR bill and various other policy interventions are likely to give a driving growth to the sector.OutlookIndias huge potential market for the metal is likely to encourage investments and the introduction & development of newtechnologies. Going ahead, the industry in its aggressive expansion plans is all set to make a landmark in key sectors such asconstruction, infrastructure and utility production that will continue to create demand for minerals and will help to shape themodern energy economy. With the 100% approval of FDI under the automatic route in metallic and non-metallic ore mining, themultinational corporations are expected to make significant investments in the Indian mining sector. With this, it is expected thatthe value of Indias mining industry will touch $57.2bn by 2017.
Equity Research :: NMDC Ltd. March 06, 2013 Financial SummaryExhibit 11: Balance Sheet (Consolidated) Exhibit 12: Profit & Loss Account (Consolidated)(`bn) FY11A FY12A FY13E FY14E (`bn) FY11A FY12A FY13E FY14EShare Capital 4.0 4.0 4.0 4.0 Net Revenue 113.7 112.6 114.9 132.1Reserve and surplus 188.2 240.1 292.9 356.7 Expenses 27.3 23.4 26.7 30.3Net Worth 192.1 244.1 296.9 360.7 EBITDA 86.4 89.2 88.2 101.9Long term provisions 0.1 0.1 0.1 0.2 EBITDA Margin % 76.0 79.2 76.8 77.1Current Liabilities 17.4 21.1 22.9 26.2Other Liabilities 0.2 0.2 0.3 0.3 Depreciation 1.2 1.3 1.4 1.5Deferred Tax Liability 1.0 1.0 1.0 1.0 EBIT 85.2 87.9 86.9 100.4Capital Employed 211.0 266.5 321.2 388.3 Exceptional items 0.0 0.5 0.0 0.0Fixed assets 16.7 26.8 32.7 41.9 Other Income 12.0 20.2 23.3 26.1Loans & Advances 2.0 5.1 5.6 6.4 Profit Before Tax 97.2 107.6 110.2 126.5Current Assets 190.9 232.0 279.8 336.2 Tax 32.3 34.9 35.6 40.9Investment 1.4 2.5 3.0 3.7 Net Profit 65.0 72.7 74.6 85.6Other Assets 0.1 0.1 0.1 0.1Capital Deployed 211.0 266.5 321.2 388.3 NPM % 57.1 64.5 64.9 64.8Exhibit 13: Ratios (Consolidated) Valuation and view FY11A FY12A FY13E FY14E NMDC provides an optimistic picture of the company‟s futureEBITDA Margin (%) 76.0 79.2 76.8 77.1 growth initiatives on high quality huge reserves with strongEBIT Margin (%) 75.0 78.1 75.6 76.0 balance sheet, fully mechanized mines, recent JVs etc. Further,NPM (%) 57.1 64.5 64.9 64.8 the company‟s earnings will get a boost once its new capacitiesROCE (%) 44.0 35.8 29.1 27.7 come on stream. Moreover, NMDC has the only mechanizedROE (%) 33.8 29.8 25.1 23.7 diamond mine in the country with a capacity of 0.1 million carats/annum. Besides, ban in Karnataka on private minesEPS (`) 16.4 18.3 18.8 21.6 augurs well for the company.P/E (x) 8.7 7.8 7.6 6.6BVPS(`) 48.5 61.6 74.9 91.0 We rate the stock as „BUY‟ at the current market price of `143,P/BVPS (x) 3.0 2.3 1.9 1.6 given the strong fundamentals, apt management and long termEV/Operating Income (x) 4.2 3.9 3.5 2.7 growth visibility. The current market price of `143, implies a P/E of ~6.6x FY‟14E EPS of `21.6 and P/BV of 1.6x on FY‟14EEV/EBITDA (x) 5.5 5.0 4.6 3.5 BVPS of `91.0 respectively.
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