NMDC Company update

7/28/2019 NMDC Company update

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Please refer to important disclosures at the end of this report 1

Weak steel demand led to frequent price cuts by NMDC: Steel demand has been

lower-than-expected beginning 2HFY2013. Steel consumption grew by only 3.3%

(multi-year low) in FY2013; steel and sponge iron prices started to decline from

October 2012. Hence, NMDC had to lower its iron ore prices frequently to

prevent inventory built ups. While prices of iron ore fines have been lowered by

6.7%, lump ore prices have been lowered by 27.5% since October 2012. Going

forward, we expect lump prices to decline further by ` 200/tonne in FY2014 given

the weak demand scenario.

Despite weak pricing; higher volumes likely to aid growth: NMDC aims to rampup its production capacity to 48mn tonne by FY2015E (current capacity – 32mn

tonne) through increased exploration of its existing mines and development of

new mines, i.e., Bailadila 11/B, Kumaraswamy and Deposit 10 & 11/A. However,

given the anticipated low steel demand, we expect sales volumes to grow by 6.9%

yoy and 7.1% yoy in FY2014 and FY2015, respectively.

High dividend yield likely to act as cushion to share price: During FY2013, NMDC

has stepped up its dividend payout to 44% (25% in FY2012) despite 12.7%

de-growth in EPS during FY2013. Given the cash-rich balance sheet, high visibility

on operating cash flows, limited capex on mine development we opine that

stepping up dividend payout is a right strategy by the company; it augurs well for

minority shareholders implying a dividend yield of 6.8% at CMP. Further, with

cash balance of ` 21,025cr (as on March 31, 2013) and low capex requirements,

we expect dividend of ` 7/share to continue during FY2014-15. High dividend

yield is likely to support the stock price in our view.

Outlook and valuation: Over the past five years, NMDC has traded at an average

EV/EBITDA of 12.0x, compared to its current valuation of 2.5x FY2015E

EV/EBITDA. Strong balance sheet, low cost of production, high-grade mines, long

mine life and high dividend yield (6.8% at CMP) make NMDC an attractive bet at

the current levels. Valuing the stock at 4.5x FY2015E EV/EBITDA, we derive a fair

price of `140 and maintain our Buy rating on the stock.

Key financials (Standalone)

Y/E March (` cr) FY2012 FY2013E FY2014E FY2015E

Net sales 11,261 10,704 10,610 11,400

% chg (1.0) (4.9) (0.9) 7.4

Net profit 7,266 6,342 6,165 6,366

% chg 11.8 (12.7) (2.8) 3.3

FDEPS (`) 18.3 16.0 15.6 16.1

OPM (%) 79.3 68.9 66.3 64.2

P/E (x) 5.6 6.4 6.6 6.4

P/BV (x) 1.7 1.5 1.3 1.2

RoE (%) 33.3 24.4 21.3 19.9RoCE (%) 40.1 27.7 23.7 22.3

EV/Sales (x) 1.8 1.7 1.7 1.6

EV/EBITDA (x) 2.3 2.5 2.6 2.5

Source: Company, Angel Research

BUYCMP ` 103

Target Price ` 140

Investment Period 12 months

Stock Info

Sector

Net Debt ( ` cr) (21,025)

Bloomberg Code

Shareholding Pattern (%)

Promoters 80.0

MF / Banks / Indian Fls 11.5

FII / NRIs / OCBs 4.8

Indian Public / Others 3.7

Abs. (%) 3m 1yr 3yr

Sensex 4.8 10.3 9.5

NMDC (17.3) (47.9) 10.3

1

19,325

5,812

NMDC.BO

NMDC@IN

40,658

1.0

201/99

435,652

Mining

Avg. Daily Volume

Market Cap ( ` cr)

Beta

52 Week High / Low

Face Value ( ` )

BSE Sensex

Nifty

Reuters Code

Bhavesh Chauhan

Tel: 022- 39357600 Ext: 6821

[email protected]

Vinay Rachh

Tel: 022- 39357600 Ext: 6841

[email protected]

NMDC

Attractively valued

Company Update | Mining

July 8, 2013



NMDC | Company Update

July 8, 2013 2

Weak steel demand led to frequent price cuts by NMDC

Steel demand has been lower-than-expected beginning 2HFY2013. Steel

consumption grew by only 3.3% (multi-year low) in FY2013; steel and sponge iron

prices started to decline from October 2012. Hence, NMDC had to lower its iron

ore prices frequently to prevent inventory built ups. While prices of fines have been

lowered by 6.7%, lump ore prices have been lowered by 27.5% since October

2012. Going forward, we expect lump prices to decline further by ` 200/tonne in

FY2014 given the weak demand scenario.

Exhibit 1: Domestic sponge iron prices and...

Source: Industry data, Bloomberg, Angel Research

Exhibit 2: ...steel prices have declined...

Source: Bloomberg, Angel Research

Exhibit 3: ...resulting in series of price cuts by NMDC (mainly lumps)

Fines Lumps

Oct-12 2,690 6,070

Nov-12 2,610 5,463

Jan-13 2,610 5,060

Mar-13 2,610 4,950

Apr-13 2,610 4,600

Jul-13 2,510 4,400


Steady production volume growth during FY2013-15

NMDC aims to ramp up its production capacity to 48mn tonne by FY2015E

(current capacity – 32mn tonne) through increased exploration of its existing mines

and development of new mines, i.e., Bailadila 11/B, Kumaraswamy and Deposit

10 & 11/A. However, given the anticipated low steel demand, we forecast iron ore

sales volumes to increase to 30mn tonne by FY2015. We expect sales volumes to

grow by 6.9% yoy and 7.1% yoy in FY2014 and FY2015, respectively.

17,500

18,500

19,500

20,500

21,500

22,500

23,500

24,500

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14E

( ` / t o n n e )

35,000

37,000

39,000

41,000

43,000

45,000

47,000

49,000

51,000

53,000

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14E

( ` / t o n n e

)

Tata Steel (S) SAIL JSW Steel




July 8, 2013 3

Exhibit 4: Iron ore capacity expansion plans


Increasing steel capacity by non-integrated players to aid sales volumes

Supreme Court (SC) banned banning iron ore mining in Karnataka during

July 2011 in order to curb illegal mining and further environmental damage.

Post SC’s permission to some category A and B mines, the ramp up in production

has been slower-than-expected. NMDC has been the only miner operating in the

region with substantial production capacity. Even in Odisha, Shah Commission has

submitted its report on illegal iron ore mining to the government. It is likely that the

government could take a strict stance in Odisha on iron ore miners, which can

result in decline in iron ore production in the state. NMDC is likely to be a key

beneficiary of the iron ore shortage in the country, especially when non-integrated

steel-makers such as JSW Steel, RINL and others raise production/increase

capacity over the coming 2-3 years.

High dividend yield likely to act as cushion to share price

During FY2013, NMDC has stepped up its dividend payout to 44% (25% in

FY2012) despite 12.7% decline in EPS during FY2013. Given the cash-rich balance

sheet, high visibility on operating cash flows, limited capex on mine development

we opine that stepping up dividend payout is a right strategy by the company; it

augurs well for minority shareholders implying a dividend yield of 6.8% at CMP.

Further, with cash balance of ` 21,025cr (as on March 31, 2013), we expectdividend of ` 7/share to continue during FY2014-15.

32

48

7

7 2

0

10

20

30

40

50

60

Current Bai ladi la 11/B Kumaraswamy Dep. 10, 11/A Total

( m n t o n n e s )




July 8, 2013 4

Exhibit 5: Dividend payout to remain high


Monetization of steel plant could re-rate the stock

NMDC is building an integrated 3mn tonne steel plant in Jagdalpur, Chhattisgarh

with a capex of ` 15,525cr (funded with internal accruals). However, we expect the

project to be value dilutive as we expect steel smelting margins to remain very low

during coming two years. Also, funding the steel project with higher debt and

lower equity would have made the optimal capital structure for the project in our

opinion.

Nevertheless, NMDC now aims to monetize the steel plant, via a ~50% stake sale.

Given its inexperience in operating a steel plant, it aims to partner a company that

has technologies capabilities of producing high-end steel products such as CRGO,

CRNO and auto-grade steels which are mostly imported in India. We believe that

the stock could get re-rated in case the sale goes through as it will partially take

away the overhang of inefficient use of cash. However, so far, only PSUs such as

RINL and SAIL have expressed interest in this venture.

Exhibit 6: Chhattisgarh steel project statusCapacity 3mn tonne per year

Capex ` 15,525cr

Land Total land acquired: 2,119 acres

Date of Completion Targeted period – FY2016


Outlook and valuation

Over the past five years, NMDC has traded at an average EV/EBITDA of 13.0x,

compared to its current valuation of 2.5x FY2015E EV/EBITDA. Strong balance

sheet, low cost of production, high-grade mines, long mine life and high dividend

yield (6.8% at CMP) make NMDC an attractive bet at the current levels. Valuing

the stock at 4.5x FY2015E EV/EBITDA, we derive a fair price of `140 and maintain

our Buy rating on the stock.

5.9

8.2

11.0

8.7

16.4

18.3

16.0 15.6 16.1

3.54.9

2.2 1.83.3

4.5

7.0 7.0 7.0

0

10

20

30

40

50

60

70

-

2.0

4.0

6.0

8.0

10.0

12.0

14.016.0

18.0

20.0

F Y 2 0 0 7

F Y 2 0 0 8

F Y 2 0 0 9

F Y 2 0 1 0

F Y 2 0 1 1

F Y 2 0 1 2

F Y 2 0 1 3 E

F Y 2 0 1 4 E

F Y 2 0 1 5 E

( % )

( ` / s h a r e )

EPS DPS Div. payout - RHS




July 8, 2013 5

Exhibit 7: Key assumptions

FY2014E FY2015E

Total sales volumes (mn tonnes) 28 30

Average domestic realization ( ` /tonne) 3,519 3,569 Source: Angel Research

Exhibit 8: EPS – Angel forecast vs consensus

Year (`) Angel forecast Bloomberg consensus Variation (%)

FY2014E 15.6 15.5 0.3

FY2015E 16.1 16.1 (0.3)

Source: Bloomberg, Angel Research

Exhibit 9: Recommendation summary Companies CMP Target Reco. Mcap Upside P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%)

(`) price (`) (` cr) (%) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

GMDC 109 155 Buy 3,459 42 5.2 4.4 1.2 0.9 2.7 1.9 24.5 23.9 30.8 30.7

NMDC 103 140 Buy 40,658 36 6.6 6.4 1.3 1.2 2.6 2.5 21.3 19.9 23.7 22.3

Coal India 290 345 Buy 183,301 19 10.6 10.4 4.0 2.8 5.6 4.7 40.2 36.1 22.8 21.8

MOIL 194 236 Buy 3,274 21 7.9 7.0 1.1 1.0 2.3 1.5 14.3 14.5 12.0 12.7


Key concerns

Disturbances due to Maoists activities in Bailadila

In the past, NMDC has faced Maoists attacks in Bailadila region. Such attacks

have affected production and movement of iron ore from Bailadila region.

Delays/cost overruns in setting up the steel plant

NMDC is planning to set up steel plant in Chhattisgarh. However, it does not have

experience in setting up steel projects. As such, there could be potential delays/

cost overruns in its steel project.




July 8, 2013 6

Profit & loss statement (Standalone)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

Net Sales 6,239 11,369 11,261 10,704 10,610 11,400

Other operating income - - - - - -Total operating income 6,239 11,369 11,261 10,704 10,610 11,400

% chg (17.5) 82.2 (1.0) (4.9) (0.9) 7.4

Total Expenditure 1,817 2,722 2,336 3,326 3,577 4,084

Net Raw Materials 211 123 234 105 224 264

Personnel 420 492 529 580 621 652

Other 1,186 2,107 1,573 2,642 2,733 3,168

EBITDA 4,422 8,646 8,925 7,378 7,033 7,317

% chg (24.2) 95.5 3.2 (17.3) (4.7) 4.0

(% of Net Sales) 70.9 76.1 79.3 68.9 66.3 64.2

Depreciation & Amort. 73 125 130 139 145 153

EBIT 4,349 8,521 8,794 7,239 6,888 7,164

% chg (24.6) 95.9 3.2 (17.7) (4.9) 4.0

(% of Net Sales) 69.7 75.0 78.1 67.6 64.9 62.8

Interest & other Charges - - - - - -

Other Income 862 1,206 2,016 2,226 2,315 2,338

Recurring PBT 5,211 9,727 10,811 9,465 9,202 9,502

% chg (21.6) 86.7 11.1 (12.4) (2.8) 3.3

Extraordinary Inc/(Exp.) - - (513.0) - - -

PBT (reported) 5,211 9,727 10,760 9,465 9,202 9,502

Tax 1,760 3,228 3,494 3,123 3,037 3,136

(% of PBT) 33.8 33.2 32.5 33.0 33.0 33.0

PAT (reported) 3,451 6,499 7,266 6,342 6,165 6,366

ADJ. PAT 3,451 6,499 7,266 6,342 6,165 6,366

% chg (21.1) 88.3 11.8 (12.7) (2.8) 3.3

(% of Net Sales) 55.3 57.2 64.5 59.2 58.1 55.8

Basic EPS (`) 8.7 16.4 18.3 16.0 15.6 16.1

Fully Diluted EPS (̀ ) 8.7 16.4 18.3 16.0 15.6 16.1

% chg (21.1) 88.3 11.8 (12.7) (2.8) 3.3




July 8, 2013 7

Balance sheet (Standalone)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

SOURCES OF FUNDS

Equity Share Capital 396 396 396 396 396 396Reserves& Surplus 13,876 18,818 24,010 27,105 30,023 33,143

Shareholders’ Funds 14,272 19,215 24,406 27,501 30,420 33,539

Total Loans - - - - - -

Deferred Tax Liability 85 103 100 100 100 100

Other Long term Liabilities 22 23 23 23 23

Long Term Provisions 15 13 13 13 13

Total Liabilities 14,357 19,354 24,543 27,638 30,557 33,676

APPLICATION OF FUNDS

Gross Block 1,771 2,273 2,388 3,388 3,888 4,388

Less: Acc. Depreciation 984 (1,174) (1,199) (1,338) (1,483) (1,636)

Net Block 787 1,099 1,189 2,050 2,405 2,752

Capital Work-in-Progress 561 568 1,494 2,164 4,364 7,064

Goodwill - - - - - -

Investments 76 136 248 248 248 248

Long Term Loans and Adv. - 199 512 512 512 512

Other non- current assets - 11 7 7 7 7

Current Assets 14,264 19,086 23,199 24,804 25,215 25,381

Cash 12,855 17,228 20,265 21,892 22,312 22,465

Loans & Advances 683 557 1,048 1,048 1,048 1,048

Other 726 1,300 1,886 1,864 1,854 1,869

Current liabilities 1,348 1,744 2,105 2,147 2,194 2,288

Net Current Assets 12,916 17,342 21,094 22,657 23,021 23,093

Mis. Exp. not written off 17 - - - - -

Total Assets 14,357 19,354 24,543 27,638 30,557 33,676




July 8, 2013 8

Cash flow statement (Standalone)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

Profit before tax 5,207 9,726 10,760 9,465 9,202 9,502

Depreciation 73 122 184 139 145 153Change in Working Capital 926 (525) (889) 64 56 80

Others (832) (1,144) (1,962) - - -

Direct taxes paid (1,770) (3,318) (3,502) (3,123) (3,037) (3,136)

Cash Flow from Operations 3,604 4,862 4,595 6,545 6,367 6,599

Inc./ (Dec.) in Fixed Assets (422) (456) (1,211) (1,670) (2,700) (3,200)

Other income 828 (3,961) 472 - - -

Cash Flow from Investing 407 (4,417) (739) (1,670) (2,700) (3,200)

Issue of Equity - - - - - -

Inc./(Dec.) in loans - - - - - -

Dividend Paid (Incl. Tax) (895) (994) (1,911) (3,247) (3,247) (3,247)

Others - (0) (0.1) - - -

Cash Flow from Financing (895) (994) (1,911) (3,247) (3,247) (3,247)

Inc./(Dec.) in Cash 3,115 (550) 1,945 1,628 420 152

Opening Cash balances 9,740 1,648 1,153 3,098 21,892 22,312

Closing Cash balances 12,855 1,153 3,098 21,892 22,312 22,465




July 8, 2013 9

Key ratios

Y/E March FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

Valuation Ratio (x)

P/E (on FDEPS) 11.8 6.3 5.6 6.4 6.6 6.4P/CEPS 11.6 6.2 5.5 6.3 6.5 6.3

P/BV 2.9 2.1 1.7 1.5 1.3 1.2

Dividend yield (%) 1.7 2.1 3.1 6.8 6.8 6.8

EV/Sales 4.5 2.1 1.8 1.7 1.7 1.6

EV/EBITDA 6.3 2.7 2.3 2.5 2.6 2.5

EV / Total Assets 1.9 1.2 0.8 0.7 0.6 0.5

Per Share Data (`)EPS (Basic) 8.7 16.4 18.3 16.0 15.6 16.1

EPS (fully diluted) 8.7 16.4 18.3 16.0 15.6 16.1

Cash EPS 8.9 16.7 18.7 16.3 15.9 16.4

DPS 1.7 2.2 3.2 7.0 7.0 7.0

Book Value 36.0 48.5 61.6 69.4 76.7 84.6

Dupont Analysis

EBIT margin 69.7 75.0 78.1 67.6 64.9 62.8

Tax retention ratio (%) 66.2 66.8 67.7 67.0 67.0 67.0

Asset turnover (x) 3.8 6.7 3.7 2.2 1.6 1.2

ROIC (Post-tax) 174.0 333.3 197.7 101.8 68.4 50.6

Cost of Debt (Post Tax)

Returns (%)

ROCE (Pre-tax) 33.4 50.6 40.1 27.7 23.7 22.3

Angel ROIC (Pre-tax) 347.9 744.9 444.2 246.6 197.7 190.2

ROE 26.6 38.8 33.3 24.4 21.3 19.9

Turnover ratios (x)

Asset Turnover (Gross Block) 3.6 5.6 4.8 3.7 2.9 2.8

Inventory / Sales (days) 60 48 68 65 60 50

Receivables (days) 43 15 20 20 20 20

Payables (days) 91 62 68 68 68 68

WC cycle (ex-cash) (days) 27 3 15 27 25 21

Solvency ratios (x)

Net debt to equity (0.9) (0.9) (0.8) (0.8) (0.7) (0.7)

Net debt to EBITDA (2.9) (2.0) (2.3) (3.0) (3.2) (3.1)Int. Coverage (EBIT / Int.) - - - - - -




July 8, 2013 10

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

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Disclosure of Interest Statement NMDC

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)



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