NMDC : SHOULD NOT MISS, GRAB THIS !!!

Scrip Code: 526371 / NMDC

CMP:  Rs. 107.10; Accumulate at Rs. 100 - 105.00 levels.

Short term Target: Rs. 115, Medium to Long term Target – Rs. 140; STOP LOSS – Rs. 98.53; Market Cap: Rs. 42,462.10 Cr; 52 Week High/Low: Rs. 202.80 / Rs. 98.70

Total Shares: 396,47,16,000 shares; Promoters : 317,19,46,580 shares –80.01 %; Total Public holding : 79,27,69,420 shares – 19.99 %; Book Value: Rs. 77.56; Face Value: Rs. 1.00; EPS: Rs. 16.00; Dividend: 450.00 % ; P/E: 6.99 times; Ind. P/E: 14.92; EV/EBITDA: 4.09.

Total Debt: NIL; Enterprise Value: Rs. 39,363.75 Cr.

National Mineral Development Corporation LTD:  The Company was founded on November 15, 1958 and is based in Hyderabad, India. It was formerly known as National Mineral Development Corporation ltd and changed its name to NMDC in August 2007. NMDC limited is an iron ore producer & exporter, operating in Chhattisgarh & Karnataka. It 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. 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 supplied 2.6916 Cr tons of iron ore to domestic industries & had exported 3.85 lakhs tons of iron ore. Its sponge iron production was at 37,260 tons and Diamond production was 18,043.44 Carats during the ended on March 31, 2012. NMDC is locally compared with Sesea Goa Limited, Orissa Mineral Development Corporation Ltd, Gujarat Minerals Development Ltd, Sterlite Industries, Moil Ltd, Godawari Power & Ispat Limited and globally with China Vanadium Titano- Magnetite Mining Company Limited of China, Atlas Iron Ltd of Australia, Gindalbie Metals Ltd of Australia, Mount Gibson Iron Ltd of Australia, Ferrexpo Plc of UK and with MMX Mineracao e Metalicos Sa of brazil and with Cliffs Natural Resources Incorporation of USA.

Investment Rationale:

NMDC is India’s largest iron ore producer which is 20% of total production of India with a capacity of 36 mn tonne. The company operates high-grade iron ore mines at Kirandul and Bacheli in Chhattisgarh and Donimalai in Karnataka. Company’s mine life is of currently of average 38 years. NMDC has recently in the month of June signed a Memorandum of understanding with Mosi Oa Tunya Development Company of Zimbabwe for the participation in mineral projects. This MoU will provide exclusivity to NMDC for participation in mineral projects at Zimbabwe. NMDC plans to develop minerals assets overseas to secure raw materials for the steel industry. MOSI an organisation, ministry of tourism and hospitality, Government of Zimbabwe has invited NMDC as strategic partner to invest in the exploration and development of iron ore, coal, gold and chrome tenements. The management of NMDC believes that this MOU is a significant step towards ensuring augmentation of NMDC’s mineral reserves and globalisation of its operations. NMDC is one of the lowest cost producers of iron ore on account of its highly mechanized mines, high-grade iron ore mines and logistical efficiencies. Further, NMDC does not have to face issues of high employee costs as a percentage of net sales. Its staff costs/net sales ratio is the lowest amongst other PSUs. NMDC aims to ramp up its production capacity to 48mn tonne by FY2015 from current capacity of 32mn tonne through increased exploration of its existing mines and development of new mines at Deposit 11B and Deposit 13 in Bailadila and Kumaraswany, respectively which are situated at Karnataka. Given its past proven track record, it seems that company’s iron ore production capacity can increase to 40mn tonne by FY2015 as compared against its target of 48mn tonne. Although sales volumes declined 3.9% yoy in FY2013, a CAGR of 8.8 % in sales growth can be expected over FY2013-15E. The Management intends to diversify its operations by moving downstream through establishing steel plants and pellet plants. Accordingly, the company aims to build an integrated 3mn tonne steel plant in Jagdalpur, Chhattisgarh. Land acquisition for the same is nearly complete, which gives comfort as land acquisition is & has been a major bottleneck to green-field projects in recent times. So this steel project is not likely to be value accretive to NMDC in the initial period of operations.

Outlook and Valuation:

NMDC Ltd announced its iron ore production at 6.82 million tonne (mt) in April-June, this was flat on year as rains affected mining operations in June. NMDC has its mines in Chhattisgarh and Karnataka. Company's iron ore output in April was 2.44 mt, in May it was 2.45 mt and in June it was 1.93 mt. The company aims to produce 30-32 mt of iron ore in 2013-14 as against 27 mt a year ago. NMDC has fallen off about 40% over last one year and is now trading at market capitalization of about Rs. 40,000 Cr. The company is debt free with Rs. 20,000 Cr of cash and generating about Rs. 6000 Cr of net profit annually. The company talks about volume growth of about 15% for FY14 and maintain a 40% dividend payouts with a chance of it going upward based on the capex spending. Due to the rupee devaluation the effect of fall in International price of iron ore wont impact much the company. NMDC has guided for a sales volume of 30- 32 mt for FY14, higher than its earlier indication of 27- 28 mtpa. Volume form Karnataka has been pegged at 9- 10 mtpa including 4.5- 5 mt each from Donimalai and Kumaraswamy. The management has clarified that Donimalai would continue to produce at a rate of 4.5- 5 mtpa in near to medium term and they have requested the CEC and the IBM in this regard. In that case, the company would not be in a hurry to ramp up Kumaraswamy to 7 mtpa immediately. The management also indicated that the Q1FY14 sales volume would be more than Q1FY13 (6.86 mt), as it has already achieved a volume of around 5.3 mt during April and May. As per the management, the average rake availability per day at present has been 17, as against 14.7 in FY13 and 18.4 during Q4FY13. The company expects if this run rate continues it can evacuate about 23 mtpa through rail. By road, the company is likely to transport around 5 mtpa and around 2.5 mt is likely to be exported. NMDC believes, at the present scenario there may not be further price cuts. Even if it has to take, it won’t be significant. Employee costs revision is meanwhile due since April1, 2012, however the company has been making provision of about 15% every quarter. Over the past five years, NMDC has traded at an average EV/EBITDA of 13.0 x, as compared to its current valuation of 3.3x FY2015E EV/EBITDA. A strong balance sheet, presence in sellers’ market i.e. iron ore, low cost of production, high-grade mines, long mine life and a High dividend yield of nearly 6% at CMP make NMDC an attractive but at current levels. Valuing the stock at 5 x FY2015E EV/EBITDA, a fair value of NMDC comes at Rs. 140 and recommend to Accumulate on dips. In my view NMDC could report EPS in FY14E & FY15E of Rs. 16.20 sh and Rs. 17.60 / sh, respectively. One could buy NMDC for a short term target of Rs. 115 and for medium to long term target will be Rs. 140

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	11,261.50	10,704.30	10,461.00	11,892.00
NET PROFIT (₹ Cr)	7,316.70	6,342.40	6,441.00	6,971.00
EPS (₹)	18.50	16.00	16.20	17.60
PE (x)	5.60	6.50	7.20	6.70
P/BV (x)	1.70	1.50	1.50	1.30
EV/EBITDA (x)	2.30	2.70	3.70	3.20
ROE (%)	33.50	24.40	22.10	21.40
ROCE (%)	49.30	36.30	25.10	25.90

I would buy NMDC LTD for the shorter term with a price target of ₹ 115.00 & for Medium to Long term my target would be Rs. 140. 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 ₹ 98.53 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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