Indraprastha Gas Ltd: Strong Fundamentals, Buy on every Dip !!!

Scrip Code: 532514 / IGL

CMP:  Rs. 316.70; Buy at current levels.
Short term Target: Rs. 360, 6 month Target – Rs. 415; STOP LOSS – Rs. 291.40; Market Cap: Rs. 4,433.80 cr; 52 Week High/Low: Rs. 454 / Rs. 285

Total Shares: 14,00,00,160 shares; Promoters : 6,30,00,080 shares –45.00 %; Total Public holding : 7,70,00,080 shares – 55.00 %; Book Value: Rs. 71.70; Face Value: Rs. 10.00; EPS: Rs. 20.97; Div: 50.00 % ; P/E: 15.10 times; Ind. P/E: 20.45; EV/EBITDA: 9.68.

Total Debt: 346.49 Cr; Enterprise Value: Rs. 4,894.96 Cr.

INDRAPRASTHA GAS LTD: Indraprastha Gas Ltd was incorporated in 1998 and is based in Delhi, India. IGL provides natural gas for automobile, domestic & commercial use in Delhi, India. The company is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited & the Government of the National Capital Territory of Delhi. In the year 1999 IGL took over Delhi City Gas Distribution Project from GAIL (INDIA). The company is the supplier of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi). The company operates 241 CNG stations, provides PNG to 1,82,000 domestic & 355 commercial customers.  The company also markets and distributes Piped natural Gas (PNG) for domestic and commercial users in NCT of Delhi. The Company is supplying Re-LNG to 21 industrial consumers in Delhi. As of March 2011, the company had an installed & licensed capacity of 2.70 million metric standard cubic meters per day natural gas. CNG is a fuel for transport sector; it’s replacing traditional fossil fuels of petrol and diesel. PNG is used for household kitchens as well as commercial users such as hotels, hospitals, embassies & restaurants. PNG is supplied to the domestic and commercial sectors in the areas of Kaka Nagar, Bapa Nagar, Pandara Road, Pandara Park, Sunder Nagar and Sujan Singh Park. The company has entered in JV with Siti Energy to set up City Gas Distribution Projects at Sonepat and Paniat located at Haryana. IGL was awarded Golden Peacock Eco Innovation Award. BPCL holds 3,15,00,080 shares (22.5 %) & GAIL holds 3,15,00,000 shares (22.5 %) in Indraprastha Gas Limited. IGL is compared to Gujarat Gas Company Ltd, Confidence Petroleum India Limited & Gujarat State Petronet Ltd.

Investment Rationale:

The CNG is an environment friendly and one of the most economical fuels for transport sector. It is replacing traditional fossil fuels of petrol & diesel, as in running cost of the vehicles is comparatively low, it is more than 65 % cheaper than petrol and more than 20 % cheaper than diesel at the current prices. Metropolitan cities have already adopted the use of CNG at large scale but other cities of India are yet to follow the same. However, Petrol which is widely used as fuel for cars is getting dearer day by day and because of this the demand for other economical fuel like Diesel also increases. However, the diesel vehicles may be in demand for some period but due to environmental concern and excess demand, the auto users will seek out other cheaper and more environment friendly options like CNG. The price difference of CNG and alternate liquid fuel will also continue to drive the large scale conversion of petrol driven private vehicles into CNG mode. Introduction of more CNG variant models by car manufactures will also provide a fillip to CNG sales in coming years. Indraprastha Gas LTD commands monopolistic situation to sell and supply CNG & PNG services in Delhi and NCR region. IGL has taken number of price hikes in last few years. Last time company has hiked the price of CNG by Rs. 2.00/kg in Delhi & NCR region on 31 Dec 2011. Imported gas is over four times costlier than the D6 gas which is sold at $4.20 per unit. IGL had raised PNG rates on 1^st Sept 2011 from Rs. 18.95 per unit to Rs. 22 per unit. Due to the monopoly of company, IGL easily manages to pass on the raise in the price of CNG or PNG onto its customers and thus able to maintain the gross profits margins. Indraprastha Gas Ltd is looking to buy stake in Mumbai base gas retailer MAHANAGAR GAS LTD (MGL). MGL offers piped natural gas to around 5 lakhs domestic customers and around 1200 small commercial and industrial establishments in Mumbai and adjoining across Mumbai, Thane, Mira Road – Bhayander and Navi Mumbai. This acquisition will help to expand its existence in another metropolitan city of the country.

Outlook and Valuation:

India’s oil and gas sector holds strategic importance in the economy as it meets around 42 % of the country’s primary energy demand and contributes over 15 % to the gross domestic product (GDP). With an interesting mix of private and government companies, the industry is scaling new heights in domestic and international markets. With a strong resource position, India ranks second (behind Australia and ahead of Vietnam), in BMI’s upstream Business Environment ratings while the country shares first place with China in BMI’s downstream Business Environment ratings. The recently released BMI forecasts states that India will account for 12.4 % of Asia Pacific regional oil demand by 2015, while satisfying 11.2 % of the supply. Due to increasing refining capacities, India is set to be a top exporter of petro-products in Asia, surpassing South Korea. India’s exports of refined products stood at 0.95 million barrels per day (b/d) as of June 2011 and US$ 4.6 billion worth of petroleum products were exported during July 2011. Recently, the Company signed long term supply agreement with Delhi Transport Corporation, which contributes approximately 25 % of CNG Sales. Net Sales and PAT of the company are expected to grow at a CAGR from 25 % in 2010 to 41 % by 2013E. During the quarter, the company reported an increase in Net Profit to Rs. 77.22 Cr from Rs. 66.27 Cr in previous year same quarter. IGL plans to expand its network to other part of Delhi and NCR regions and to other metropolitan cities like Mumbai. It has plans to invest around Rs. 600 cr by FY13. The capex amount will be equally divided between CNG & PNG product services and from which has already spent around Rs. 300 cr in first half of FY12. Company is going to add new CNG pump stations to its network between FY12 -13. Out of these around 50 stations are likely to be operational by FY12, while 35 more stations are in construction mode, which will be ready to use by FY13. Due to raising prices of other fuels like Petrol & diesel, the demand for CNG equipped vehicle is expected to rise in coming years. Actually the prices of mostly used fuel Petrol vehicles like cars has been increased rapidly in the last few years, now passengers are looking for other cheaper options and CNG is a good option. Company is expecting more than 50,000 cars which are likely to be converted into CNG on an annual basis in Delhi and DTC i.e. Delhi Transport Corporation, a big consumer of CNG is likely to launch additional 4,000 buses over the period of next couple of years. At the current market price of Rs. 316.70, the stock is trading at a PE of 13.51 x FY12E and 10.60 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 23.44 in FY12E and Rs. 29.87 in FY13E. One can buy IGL with a target price of Rs. 415.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 360.00

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	1,083.83	1,750.46	2,406.88	3,008.60
NET PROFIT (Rs. Crs)	215.50	259.76	328.09	418.24
EPS (Rs.)	15.39	18.55	23.44	29.87
PE (x)	20.84	19.73	15.62	12.25
P/BV (x)	5.44	5.10	3.85	2.93
EV/EBITDA (x)	11.17	10.21	7.68	6.14
ROE (%)	26.11	25.88	24.63	23.90
ROCE (%)	39.30	29.54	31.09	31.24

I would buy IGL with a price target of Rs. 415 for Medium to Long term and Rs. 360 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. 291.50 on every purchase.


READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

Larsen & Toubro : Grab Great Business at Great Price !!!

Scrip Code: 500510 / LT

CMP:  Rs. 1131.80; Buy at current levels & on Dips.

Short term Target: Rs. 1155, 6 month Target – Rs. 1400; STOP LOSS – Rs. 1040;  Market Cap : Rs.  69,171.21 Cr; 52 Week High / Low: Rs. 2001.70 / Rs. 969.15

Total Shares: 61,11,61,097 shares; Promoters : 26,18,94,131 shares –42.85 %; Total Public holding : 34,92,66,966 shares – 57.15 %; Book Value: Rs. 351.07; Face Value: Rs. 2.00; EPS: Rs. 66.62; Div: 725.00 % ; P/E: 16.98 times; Ind. P/E: 12.81; EV/EBITDA: 10.55.

Total Debt: 7,161.11 Cr; Enterprise Value: Rs. 77,282.67 Cr.

LARSEN & TOUBRO LTD: LARSEN & TOUBRO LTD was founded in 1938. Larsen & Toubro Limited operates as a technology, engineering, construction, and manufacturing company worldwide. Larsen’s divisions include Engineering and Construction Projects (E&C), Heavy Engineering (HED), Engineering Construction and Contracts (ECC), Electrical and Electronics (EBG), Machinery and Industrial Products (MIPD), and Information Technology & Engineering Services. These divisions undertake engineering design and construction of infrastructure and industrial projects, including civil, mechanical, and electrical & instrumentation engineering. The customer profile includes names, such as Samsung, Chevron, Bechtel, Kvaerner, Pirelli, Siam Michelin, and Goodyear. The Heavy Engineering (HED) division manufactures and supplies custom designed and engineered critical equipment and systems to the needs of core-sector industries and the defense sector. It is the preferred supplier of equipment for a select range of products, globally. The Division has entered into Shipbuilding business and engages in construction of specialty commercial vessels and warships for the navy, as well as the coast guard.  The Engineering Construction and Contracts (ECC) division delivers engineering, procurement, and contract solutions in the oil and gas, petrochemicals, power, and water space industries. The Electrical and Electronics (EBG) division offers solutions in low & medium voltage categories. Its businesses consists of switchgear, switchboards for different applications, including marine, meters, automation systems, petroleum dispensing pumps, medical equipment and tooling solutions and has operations at different locations in India (two in Mumbai and one each in Ahmednagar, Mysore, Faridabad and Coimbatore) and one unit for manufacturing operations in China. The Information Technology and Engineering Services Information and Technology Services division offers e-Engineering solutions, including product design and engineering analysis, engineering process support, production and plant engineering, asset information management, and design automation to high end technology verticals, such as automotive, aerospace, marine and ship design, plant engineering, and industrial products. This division also provides embedded systems and solutions comprising supply of hardware, application software, and enclosure design for electronics product design and development in automotive, medical, semiconductor, and industrial products. On November 30, 2009, Nuclear Power Corporation Of India Limited and Larsen & Toubro Ltd. announced the formation of a joint venture company to produce special steels and ultra heavy forgings. On January 22, 2010, Larsen & Toubro Ltd. formed a joint venture with Sapuracrest Petroleum Bhd to undertake installation of pipelines and construction of offshore rigs and platforms in India, West Asia and South East Asia. L&T does business in Malaysia, the United States, the Unite Kingdom, Brazil, Saudi Arabia, the United Arab Emirates, Qatar, Bangladesh, and Sri Lanka. L& T LTD is compared globally with Ssangyong Engineering & Construction, Aker Solutions ASA and JTEKT Corporation.

Investment Rationale:

Larsen & Toubro’s (L&T) construction arm has bagged various orders aggregating to Rs. 1,000 cr in 3QFY2012. In the buildings and factories segment, the company has secured a Rs. 200 cr order from GMR Group for the construction of an air traffic control tower and associated works at Delhi International Airport. In the power Transmission & Distribution segment, the company has obtained new orders adding up to Rs. 334 cr from reputed clients for the construction of transmission lines and substations across India. An international order valued at Rs. 185 cr has been secured in Kuwait for the construction of a substation and associated overhead transmission line works. Orders valued at Rs. 282 cr were secured from Greater Mohali Area Development Authority for the construction of utility facilities such as water supply network, waste-water collection network, storm water network, road works, electrical works and other associated development works in Aerocity, Mohali. With these orders in hand, the company’s outstanding order book stands at whopping Rs. 1,50,553cr (3.4x FY2011 revenue), which provides good revenue visibility. This order booking takes the company’s total declared orders to Rs. 8,364 cr until now in this quarter against orders received worth Rs. 13,336cr in 3QFY2011. The drying up of order inflows is one of the major concerns for the stock and has led to underperformance in the recent past. L&T retained its revenue growth guidance at 2 5% for FY12E on the back of a robust order backlog and stable execution therefore giving optimistic assumption with higher probability of downward revision in ensuing quarters. However it sharply revised down guidance for EBITDA margins and order inflows; it is expected that EBITDA margins could decline by 0.75 % -1.25 %; there could be change in revenue mix and sharp increase in raw material prices. It is expected that growth in order flows could be muted by 5 % against 15 % – in view of 11 % yoy decline in H1FY12, This sector see no signs of revival in investment spends and continued postponements in order finalizations, but as said earlier that LARSEN & TOUBRO has an order book at whopping Rs. 1,50,553cr its is easily possible for L&T to bring its revenue on track as L&T is in better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities

Outlook and Valuation:

I initiate my coverage on L&T with Buy, on the back of its robust core businesses, infrastructure opportunities and potential for value unlocking in its subsidiaries. Core business would drive earnings, as it has robust order book and good revenue visibility. Subsidiaries like IT Services, and Infra would be valuation triggers. The infra-led growth would also be backed by growing portfolio and geographical reach via JVs & acquisitions giving good revenue visibility. L&T has underperformed BSE Sensex and being in trading range from Rs. 970 – Rs. 1100, owing to factors such as slowing order inflows and rising competition (especially in the BTG equipment segment), leading to fears of slippage on order inflow guidance. Also, L&T lost the public sector shipyard, Mazagon dock, for defense and naval ships and failed to win the recent ONGC pipeline tenders. It is believed that though L&T would find it difficult to meet its revised guidance for FY2012 (growth of 5 % in order inflow and 25 % in revenue), but still it is better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities. On the valuation front, due to the recent correction in prices, the stock is trading at PE of 14.85x and 12.63 for FY2012E and FY2013E earnings respectively, adjusted for subsidiary value, which is lower than its historical PE of 15-20x gives an excellent opportunity to grab such a fantastic business at such a low price & Hence, any further price correction provides a good opportunity to accumulate. Larsen & Toubro to declare its Q3 results ended 31st Dec 2011 on 23rd Jan 2012.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	43,698.90	52,099.10	61,061.50	67,581.40
NET PROFIT (Rs. Crs)	3,374.50	4,179.00	4,566.20	5,269.20
EPS (Rs.)	56.20	68.90	76.20	89.60
PE (x)	23.80	19.40	17.50	14.90
P/BV (x)	3.80	3.30	2.80	2.40
EV/EBITDA (x)	14.00	12.10	11.70	10.40
ROE (%)	19.30	18.20	17.30	17.60
ROCE (%)	15.60	14.30	12.90	13.10

I would buy LARSEN & TOUBRO LTD with a price target of Rs. 1400 for Medium to Long term and Rs. 1155 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. 1040 on every purchase.


READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

Ashok Leyland : Accumulate on every dip.Good stock !!!

ON 5 Jan 2012

Scrip Code: 500477 / ASHOKLEY

CMP:  Rs. 22.60; Buy at Rs. 22.20 levels.

Short term Target: Rs. 24; Medium to Long Target – Rs.30; STOP LOSS – Rs.20.50; Market Cap: Rs. 6,013.13 cr; 52 Week High/Low: Rs. 34.38 / Rs. 20.00

Total Shares: 266,06,76,634 shares; Promoters : 102,72,37,424 shares –38.61 %; Total Public holding : 163,34,39,210 shares – 61.39 %; Book Value: Rs. 9.99; Face Value: Rs. 1.00; EPS: Rs. 2.19; Div: 200 % ; P/E: 10.31 times; Ind. P/E: 25.95; EV/EBITDA: 6.92. Total Debt: 2658.19 Cr; Enterprise Value: Rs. 8711.05 Cr.

ASHOK LEYLAND LTD: The Company was founded in 1948 and is based in Chennai, India. Ashok Leyland limited is a subsidiary of Hinduja Automotive Ltd. It was named after the founder Raghunandan Saran’s son Ashok, the company was renamed ‘ASHOK LEYLAND’ with equity participation from Leyland Motors Ltd in 1955. Ashok Leyland ltd engages in the manufacture and sale of commercial vehicles and related components in India and internationally. In the year 1967, India’s first inland made double decker was launched by Ashok Leyland. The Company's products include Buses – double decker and vestibule buses, CNG buses, Trucks – including multi axle trucks & tractor trailers, diesel engines, defense and special vehicles for Indian army. From 18 seater to 82 seater double-decker buses, from 7.5 ton to 49 ton in haulage vehicles, from numerous special application vehicles to diesel engines for industrial, marine and genset applications, Ashok Leyland offers a range of products. In the year 2006 Ashok Leyland acquired AVIA the Czech Republic based truck manufacturer. In 2007 the company formed a JV with Nissan Motor Company, Japan for the manufacture and marketing of light commercial vehicles, same year Ashok Leyland signed another JV with Continental AG, Germany – for the development of automotive Infotronics. In 2010, the Company acquired 26% stake in Optare plc. a bus manufacturer in the United Kingdom. Ashok Leyland Ltd is compared to: Bajaj Auto Limited, Motherson Sumi Systems Limited in India and Xiamen King Long Motor Company Limited globally.

Investment Rationale:

Management expects industry to grow at a moderate rate of 5 % - 6 % in FY12. Higher interest rates, rising fuel prices and sluggish freight rates in Southeast are likely to impact sentiments negatively. Higher tonnage tipper segment is witnessing strong demand with about 50 % YoY growth in H1FY12 largely driven by construction activities. Regional wise sales increased by 112 % in west, 42 % in South, 15 % in North and decline in East. Company’s strength in Tipper segment was affected due to supply constraints of fully built vehicles. Management expects to maintain its market share of 25 % in FY12 driven by penetration in northern and eastern markets. To achieve this Ashok Leyland is increasing dealerships and service stations, increasing production of fully built vehicles (FBV) and necessary price corrections (for select products). It aims to do 3500 units of FBV as of 2000 to 2500 units per month currently. Implementation of ban on overloading has been gaining momentum in Uttar Pradesh, Madhya Pradesh, Bihar and now in Karnataka also. Ashok Leyland has started dispatching its LCV ‘Dost” under Nissan JV with volumes of 210 units in October. During November domestic prices were increased upto 1 %. Internationally prices of metals like Aluminum & Copper are witnessing marginal reduction which is partly offset by unfavorable exchange rate. Management expects benefits in second half of FY12 and maintains EBITDA margins of 10.5 % for FY12. Management targets 9,000 units of manufactured engine sales in H2FY12. Spare parts sales were at Rs. 370 Cr in H1 and management targets Rs. 400 Cr in H2FY12. Ashok Leylands JV with John Deere is expected to launch its first product named Backhoe loader followed by wheel loader in FY13, with the target volumes of 8,000 to 9,000 units. Ashok Leylands Continental JV has started supplying dashboard electronic equipment which is to be fitted in UTruck platform. Management expects major of its JVs to turn EBITDA positive in the next 2 to 3 years. U-Truck has been launched in tractor-trailer and tipper segments only - with the volumes of 2,000 units in H1FY12 and targets its volumes of 6,000 by H2FY12.  Loans & Advances are up by Rs 310 Cr largely due to VAT accumulation of Rs. 46 Cr and excise of Rs. 55 Cr. Also, capital advances are up by Rs. 50 Cr. Management targets to bring down Loans & Advances by Rs. 100 Cr going ahead. It is expected that Ashok Leyland will maintain exports target of 13,000 vehicles for FY12 and targets 15 % of total volumes as exports this is possible due to increased penetration in new markets of Latin America and Africa.

Outlook and Valuation:

Ashok Leyland is raising its stake in British bus maker Optare Plc to 75.1 % following a re-financing agreement.  Ashok Leyland had already acquired a 26 % stake in Optare in July 2010 aiming at a long-term strategic partnership. This re-financing was achieved with Ashok Leyland facilitating a credit-line to support Optare's re-banking options and providing a substantially improved working capital facility for the business. Optare's management believes that this re-financing represented a "defining moment" in the company's turnaround plan, which the company had commenced in 2009. Along with the access to Optare’s technology including modern range of city buses, Ashok Leyland sees a large opportunities to grow in the global bus market. Both the management sees this as an important element in their vision of being among the top 5 bus manufacturers globally. Through leveraging the synergies of the two companies, managements are confident that going forward they will be able to accelerate technology sharing, develop future-ready products and substantially increase their global footprint. Ashok Leyland has been trading in the range of Rs. 21 & Rs. 24. Keeping these in mind, Ashok Leyland could be an ideal Buy as well as at declines with a stop loss placing at Rs. 20.50 for a target of Rs. 30.00. Uncertainty with respect to demand for Ashok Leyland (due to regional disparity) continues to be a concern on the volume front. However, price hikes and lower Raw Material cost can provide cushion against the drop in earnings due to lower volumes. The company could report EPS of Rs. 2.40 x for FY12E and Rs. 3.00 for FY13 estimates. The stock could be bought with the short term target of Rs. 24 & Rs. 30 for Medium to long term period with the strict stop loss of Rs. 20.50 

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	7,244.70	11,117.70	12,542.70	14,274.70
NET PROFIT (Rs. Crs)	388.90	657.30	627.40	786.20
EPS (Rs.)	1.50	2.50	2.40	3.00
PE (x)	18.50	10.90	11.40	9.10
P/BV (x)	3.10	2.70	2.40	2.10
EV/EBITDA (x)	11.20	6.70	5.90	4.90
ROE (%)	17.60	26.40	22.30	24.70
ROCE (%)	12.50	18.50	17.40	19.40

I would buy ASHOK LEYLAND LTD with a price target of Rs. 24 for Short term and Rs. 30 for the Medium to long 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. 20.50 on every purchase.

New Year Wishes for Readers !!!

Every man should be born again in the first day of January. Start with a fresh page.  Take up one hole more in the buckle if necessary, or let down one, according to circumstances; but on the first of January let every man gird himself once more, with his face to the front, and take no interest in the things that were and are past.

Keep smiling, God Bless u all and Take Care !!!

NMDC : A VALUE PICK !!!

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 2^nd 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.

KEY FINANCIALS	FY10	FY11	FY12E	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 (%)	33.40	50.60	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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