NMDC LIMITED: Accumulate And Buy on Dips !!!

Scrip Code: 526371 / NMDC

CMP:  Rs. 166.25; Buy at Rs. 160 -164 levels.
Medium to Long term Target: Rs. 187; STOP LOSS – Rs. 153.00; Market Cap: Rs. 65,913.40 cr; 52 Week High/Low: Rs. 280.00 / 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. 66.79; Face Value: Rs. 1.00; EPS: Rs. 18.33; Div: 330 % ; P/E: 9.6 times; Ind. P/E: 16.36; EV/EBITDA: 6.70.

Total Debt: NIL; Enterprise Value: Rs. 65,992.69 Cr.

National Mineral Development Corporation LTD:  The Company was founded in 1958 and is based in Hyderabad, India. It was formerly known as National Mineral Development Corporation ltd and changed its name to NMDC in January 2008 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. On December 12, 2011 the company incorporated NMDC POWER LTD as is wholly owned subsidiary. NMDC is compared with SESAGOA LTD in India, Cliffs Natural Resources Incorporation and Ferexpo Plc globally.

Investment Rationale:

NMDC management targets its production to reach 40mn tonnes by FY2014E–15E through increased exploration of its existing mines and development of new mines, i.e., Deposit 11B and Deposit 13 in Bailadila and Kumaraswany, respectively, in Karnataka. It is expected that NMDC’s sales volumes to post a CAGR of 10.2 % during FY2011-13. With a strong balance sheet along with net cash of about Rs. 20,000 Cr, acquisition of more mining assets overseas cannot be rule out by the company, in September 2011, NMDC purchased a 50 % stake in Australia-based Legacy Iron Ore (Legacy) as a cornerstone investor for Rs. 92 Cr. Also, the company 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. However, given that NMDC is a government-owned company, it is not expected to foresee a big-ticket acquisition. Seeking to diversify into steel making, NMDC management intends to diversify its operations by moving downstream through establishing steel plants and pellet plants. Accordingly, on December 10, 2010, the company signed a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 3mn 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. Over 90 % of land acquisition is complete, which gives comfort as land acquisition has been a major bottleneck to Greenfield projects in recent times here in India. NMDC is setting up a 3 MTPA steel plant in Chhattisgarh, and hopes to start its production from 2014, coinciding with the commissioning of facility for the alloy. In a recent presentation to the steel ministry, NMDC has said that it is taking "all necessary steps" to start production from the Shahpur West block in Madhya Pradesh in 2014. Coal Ministry has already given approval to the mine closure plan for the block. The coal ministry had allotted two blocks - Shahpur East and Shahpur West in Shahdol district of Madhya Prdesh to NMDC in 2009. Following this, a Memorandum of Understanding (MoU) was signed between NMDC and Mineral Exploration Corporation (MECL) to carry out exploration in both the blocks. NMDC applied for environment and forest clearance and as per the approved mine plan, coal production is expected to start from 2014.

Outlook and Valuation:

NMDC has advantage in setting up its steel plant as it has a captive source of coal for its steel plant which would help NMDC to hedge itself against price fluctuations, which is almost a certainty event in 2014 as the raw material is getting scarcer and costlier day by day. Domestic steel manufacturers, including Steel Authority of India, is continuously facing the heat of scorching coal prices in international market as its captive source can meet only a small part of the total requirement. NMDC is setting up a 3 Million Tonnes Per Annum steel plant at Nagarnar in Chhattisgarh with an outlay of Rs. 15,525 Cr. It has placed all major orders including sinter plant, blast furnace, and raw material handling systems, steel melting shop and oxygen plant among others. Being a major iron ore producer itself, adequate supply to feed the steel plant is not a matter of concern for NMDC. The company aims to produce over 30 million tonnes iron ore in current fiscal, almost 20 per cent more than in 2011-12 by enhancing production from the existing mines. It has plans to produce 40 million tonnes iron ore by 2014-15. On performance side - NMDC's revenue fell 31 % Y-o-Y to Rs. 2,594.5 Cr in Q4FY12. The fall was on the back of lower sales volume due to damage to Essar's slurry pipeline and volume stood at 6.4 MT compared to 8.4 MT in corresponding quarter of previous year. The company reduced the iron ore prices by 20 % for fines and 3 % for lumps during the quarter which impacted the blended realization which stood at Rs. 4,054/ton ($80/ton) in Q4FY12 compared to Rs. 4,488/ton in Q4FY11. EBITDA of the company plunged by 28 % Y-o-Y to Rs. 1,977.3 Cr in Q4FY12 compared to Rs. 2,739.1 Cr in Q4FY11. EBITDA/ton declined by 5 % Y-o-Y to Rs. 3,090/ton in Q4FY12 compared to Rs. 3,261/ton in Q4FY11. Other Income grew by 23.9 % Y-o-Y to Rs. 546.7 Cr in Q4FY12 compared to Rs. 441 Cr in Q4FY11. PAT too fell by 21 % Y-o-Y to Rs. 1,642.2 Cr in Q4FY12 compared to Rs. 2,098.6 Cr in Q4FY11. On annual basis - in FY12, NMDC’s top line impacted by 1 % Y-o-Y to Rs. 11,261.8 Cr as compared to Rs. 11,368.9 Cr in FY11 on the back of the marginal 4 % growth in sales of iron ore to 27.30 MT. EBITDA and PAT improved by 1.7 % and 11.7 % Y-o-Y during the year respectively. However, total expenditure as a percentage of sales declined 200 basis points to Rs. 2,466.1 Cr in FY12E as compared to Rs. 2,722.4 Cr in FY11. This led EBITDA whopping to 1.73 % to Rs. 8,795.7 Cr in FY12 compared to Rs. 8,646.4 Cr in FY11. This was supported by the e-auction sales of iron ore which is priced higher than market prices and the company being the only miner in Karnataka faced the iron ore ban issued on 26th August 2011 in the locality. EBITDA adjusted Other Income grew drastically by 9.75 % Y-o-Y to Rs. 10,812.2 Cr in FY12 compared to Rs. 9,852.1 Cr in FY11. PBT and PAT too grew by 10.6 % Y-o-Y and 11.7 % Y-o-Y to Rs. 10,759.4 Cr and Rs. 7,265.3 Cr respectively during FY12. The company planned capex stood at Rs. 4,655 Cr for FY13 for the capacity addition. NMDC, maintained its EPS at Rs. 18.3 per share in FY12 as compared to Rs. 16.4 per share in FY11. Over the past five years, NMDC has traded at an average EV/EBITDA of 13.7 x, compared to its current valuation of 3.8x FY2014E EV/EBITDA. Valuing the stock at 4.5 x FY2013E EV/EBITDA, a fair value of NMDC comes at Rs. 187 and recommend to Accumulate on dips. In my view NMDC could report EPS in FY13E & FY14E of Rs. 19.10 / sh and Rs. 20.90 / sh, respectively. One could buy NMDC for a medium to long term target of 187.  

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	11,369.00	11,261.00	11,959.00	13,062.00
NET PROFIT (Rs. Crs)	6,499.00	7,266.00	7,553.00	8,287.00
EPS (Rs.)	16.40.70	18.30	19.10	20.90
PE (x)	10.20	9.20	8.80	8.00
P/BV (x)	3.50	2.70	2.20	1.80
EV/EBITDA (x)	5.70	5.00	4.40	3.80
ROE (%)	38.80	32.90	27.10	24.40
ROCE (%)	50.60	39.60	32.90	29.70

I would buy NMDC LTD with a price target of Rs. 187 for Medium to Long term. 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. 153.00 on every purchase.

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