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 |
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