Tuesday, May 29, 2012

>NMDC: Q4FY12 Results Update

Muted performance due to lower volumes; maintain buy

NMDC recorded muted performance (as was expected) in Q4FY12 with revenues at Rs25.9bn as sales volume were adversely affected by damage to Essar’s slurry pipeline and stood at ~6.4MT. NMDC had reduced iron ore prices for the quarter and blended realizations stood at ~Rs4054/tonne (~US$80/tonne). EBITDA stood at Rs19.8bn (margin of 76.2%) and PAT was down 11.6% QoQ to Rs16.4bn. NMDC is targeting sales volume of ~30 MT in FY13E and has shifted its pricing mechanism from export parity based to domestic demand-supply linked system. We see the change in pricing mechanism as a positive for the stock and also expect higher volume growth going ahead on expansion and better logistics. Acquisition of strategic stakes in various global mining assets remains a key positive trigger for the stock. We revise our volume estimates lower marginally (by ~3%) for FY13E/14E and maintain buy with a target price of Rs 227.

 Volumes subdued and pricing lower: Sales volumes stood at ~6.4MT, down ~24% YoY and flat QoQ as e-auction in Karnataka saw lower sales and Chhattisgarh sales were affected by damage to Essar’s slurry pipeline. Realizations dropped by ~8% QoQ as NMDC announced price cuts for both fines and lumps for the quarter in line with global softness in prices. Sales volume for FY12 stood at 27.3 MT and target for FY13E stands at ~30 MT.

 EBITDA margin falls as expected: As expected margin fell during the quarter and EBITDA stood at ~Rs19.8bn (margin at 76.2% and EBITDA/tonne of Rs3090) as volumes fell and realizations were lower due to price cuts.

 Pricing mechanism changed from export parity to domestic linked: NMDC has changed its pricing mechanism from being export parity based to the one linked with domestic demand-supply decided by a committee on a quarterly basis. NMDC revised prices upwards by ~8% QoQ for Q1FY13. Volumes continue to remain affected by damage to the Essar pipeline and company has taken various steps in increasing evacuation from Chhattisgarh mines (uniflow loop line system expected to result in 3MT increase in evacuation). Company has guided for a capex of ~Rs46bn for FY13E with ~Rs30bn to be spent on the 3 mtpa steel plant at Chhattisgarh. NMDC is targeting ~30 MT of production in FY13E and we revise our
FY13E/FY14E volume estimates lower by 3.2%/2.9%. Our realization estimates are lower in US$ terms for FY13E/14E by 3%/2.2%. We estimate 30 MT of iron ore sales in FY13E (Karnataka – 7.5MT and Chhattisgarh – 22.5MT), implying a growth rate of ~10%.

 Maintain Buy on attractive valuations: We remain positive on the company as we see volumes improving from FY13E onwards with higher e-auction sales volume from Karnataka, better evacuation from Chhattisgarh and expansion at Bailadila 11 B mines. We find the stock trading at attractive valuations with FY13E P/E of 8.8x and FY13E EV/EBITDA of 4.6x. We value the company at 6.5x FY14E EV/EBITDA to arrive at a target price of Rs227. We revise our target price upwards to Rs227 from Rs224. Maintain buy.