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Friday, December 23, 2011


Scrip Code: 526371 / NMDC
CMP:  Rs. 150.60; Buy at Current levels.
Short term Target: Rs. 165, 6 month Target – Rs. 240; 
STOP LOSS – Rs. 138.55; Market Cap: Rs. 59,708.62 cr; 52 Week High/Low: Rs. 305.00 / Rs. 135.60
Total Shares: 396,47,16,000 shares; Promoters : 356,84,18,180 shares –90 %; Total Public holding : 39,62,97,820 shares – 10 %; Book Value: Rs. 48.46; Face Value: Rs. 1.00; EPS: Rs. 18.62; Div: 330 % ; P/E: 8.09 times; Ind. P/E: 17.23; EV/EBITDA: 10.81. 
Total Debt: NIL; Enterprise Value: Rs. 57,072.08 Cr.

National Mineral Development Corporation LTD: The Company was founded in 1958 and is based in Hyderabad, India. NMDC is an iron ore producer & exporter, operating in Chhattisgarh & Karnataka. NMDC ltd engages in the exploration and production of various minerals in India and internationally. It explores for iron ore, copper, rock phosphate, lime stone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite & beach sand. The company also focuses on coal and gold properties, as well as platinum group of elements and bauxite. It has iron ore deposits in Bailadila Chhattisgarh, Iron ore mines at Donimalai Karnataka; diamond mines at Panna Madhya Pradesh; magnesite mines at Jammu; & Arki lime stone project in Himachal Pradesh. In addition, the company involves in investing in the development of renewable energy resources, which include wind mill projects of approximately 10.5 MW capacities at Karnataka. NMDC supplied 2.3752 Cr tons of iron ore to domestic industries & had exported 25.63 lakh tons of iron ore. On December 10, 2010, NMDC announced a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 2mn tonne steel plant in Karnataka. This JV will have captive coking coal mine in Russia, while it will have an iron ore mining subsidiary in India. On September 2011, NMDC purchased a 50 % stake in Australian-based Legacy Iron Ore (Legacy) as a cornerstone investor for Rs. 92 Cr. NMDC is compared with SESAGOA LTD in India, Cliffs Natural Resources Incorporation and Ferexpo Plc globally.      

Investment Rationale:
NMDC management aims to ramp up its production capacity to 50mn tonnes by FY2014–15E through increased exploration of its existing mines and development of new mines, i.e., Deposit 11B in Bailadila and Deposit 13 in Kumaraswamy in Karnataka. The targeted cost for the development of the three mines is around Rs. 2,400 Cr. However, in FY2011, the company’s volumes have been impacted by iron ore ban in Karnataka and Naxal activities in the Dantewada region of Chhattisgarh. Management intends to diversify its operations by moving downstream through the establishment of steel plants and pellet plants.
Historically, NMDC has maintained its dividend payout ratio at in the range of 22 % -24 %. In FY11, it paid an interim dividend @ 115 % on the equity shares, aggregating to Rs. 460 Cr in February 2011 and also announced a final dividend of 215 % on the paid up equity share capital, aggregating to Rs. 850 Cr. The total dividend payout for the year stood at Rs. 1310 Cr. Including dividend tax, total cash outflow for the company stood at Rs. 1520 Cr. NMDC has been generating steady cash flow over the last two years. With the very little capex and no buyouts the cash level for the company has been rising year on year. On account of the buoyancy in prices in FY11 the company’s cash level rose the highest. Cash at the end of FY11 stood at Rs. 17,200 Cr. In fact NMDC’s cash level has jumped 5.5 x since FY06. As a result, NMDC has been on the lookout for mineral resources globally as domestic capacity expansion has been slower than expected and new mining licenses in the country are hard to come by. The company is also investing into facilities for value addition. Over the next two years, it is expected that the cash levels could increase 55.7 % to Rs.26,800 Cr, translating into cash per share of Rs. 67.59. With such a strong balance sheet, NMDC is currently prospecting various mining assets, including an iron ore mine and a phosphate mine in Australia, an iron ore mine in Brazil and a coking coal asset in Russia. So an over sea acquisition of mining assets cannot be ruled out. NMDC being a Cash rich PSU it’s the strong candidate for buyback of government held shares which will be an EPS accretive. NMDC is setting up value addition plants like -
Chattisgarh Steel plant: NMDC is setting up Chhattisgarh Steel Plant a 3mtpa steel plant at Nagarnar near Jagdalpur, Chhattisgarh. It has acquired 1,782.62 acres of land for the plant (995 in 1st phase and 787.62 acres in 2nd Phase). Formal allotment of additional 102.64 acres of Government Land is under process. Besides, diversion of about 63.52 acres of forest land is also under process in the government. The board has approved an investment of Rs. 15,530 Cr for setting up the plant. Environmental Clearance from MoEF was received subject to the conditions.
Donimalai pellet plant: The 1.2mtpa pellet plant at Donimalai has been built largely to prolong the life of Tailing Dam at Donimalai by using slimes for making pellets. Execution of project is divided into six packages and the estimated capital expenditure is Rs. 570 Cr. Civil works are in progress at site. Orders are placed for site leveling. Project is scheduled to be completed by March 2013.
Bacheli pellet plant: Setting up of 2mtpa pellet plant project is kept on hold considering the proposed slurry pipeline from Bacheli to Vizag. It is planned to relocate the project from Bacheli, Dantewada to Nagarnar, Jagdalpur.

Outlook and Valuation:
Iron Ore market is expected to remain tight on the back of restricted supplies from India. Chinese steel production too has not cooled off as per the market’s expectations. Upside risks to the volume estimate remain high as the company has ramped up its output at the Kumarswamy mine in Karnataka over the last one month. Before the mining ban was implemented in Karnataka, NMDC had lowered its production target to 28-29mn tons in FY12 because of mining hurdles such as stricter green laws. However, with the Supreme Court allowing NMDC to mine iron ore in the Bellary area, partially lifting a ban levied by the Karnataka government, the company plans to produce 32mn tons, against the previous target of 29mn tons. NMDC’s cost of production increased sharply in FY11 on account of an increase in royalty and jump in transportation costs. Per ton cost of production increased to Rs. 1,077/ton in FY11 from Rs. 785/ton in FY10. The above two cost heads accounted for 88 % of the increase in per ton costs for the company in FY11. Royalty on iron ore was increased from a fixed royalty of up to Rs. 27 a ton, depending on its variety and grade to 10 % on its prevailing market price. To benefit from the strong iron ore prices, Railways have increased the freight on iron ore meant for exports. Over the last one year, railways have increased its fare by 3 x. Going forward it is expected that  the costs will decrease by 4.7 % yoy in FY12 as the impact higher royalty and export tax would be negated by an increase in overall volumes and decline in exports.
After the 24 % correction in the stock price over the last 6 months, the stock is trading at 5.5x FY13 EV/EBIDTA, which is marginally higher than its peers. NMDC should trade at a premium to its peers considering the high quality reserves and the low cost operations it has. NMDC reported strong growth in sales volumes during 2QFY2012, led by ramp-up in its Karnataka iron ore mines. Going forward, a robust growth in sales volumes is expected. The stock is currently trading at 6.5x FY2012E and 5.40x FY2013E EV/EBITDA. Valuing the stock at 5.4x FY2013E EV/EBITDA, the fair price of NMDC comes at Rs. 241. In my view NMDC could report EPS of Rs. 21.60/sh in FY12E & of Rs. 23.60/sh in FY13E.

SALES (Rs. Crs) 6,239.00 11,369.00 13,582.00 14,932.00
NET PROFIT (Rs. Crs) 3,451.00 6,499.00 8,565.00 9,346.00
EPS (Rs.) 8.70 16.40 21.60 23.60
PE (x) 27.20 14.50 11.00 10.10
P/BV (x) 6.60 4.90 3.60 2.80
EV/EBITDA (x) 18.30 8.90 6.50 5.40
ROE (%) 26.60 38.80 37.90 31.50
ROCE (%) 33.4050.60 47.40 39.60

I would buy NMDC LTD with a price target of Rs. 241 for Medium to Long term and Rs. 165 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 138.55 on every purchase.


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