Research Reports On NMDC (Latest stock pick of Radhakishan Damani)

Research report by Sharekhan

Valuation – Maintain Buy rating on NMDC with a revised PT of Rs. 205: NMDC’s valuation of 3.8x its FY2023E EV/EBITDA (excluding value of the steel plant at 0.5x CWIP) is attractive as it is at a steep discount of 28% to average EV/EBITDA multiple of 5.3x for global mining peers despite earnings visibility and strong return ratios (RoE/RoCE of 22.1%/24.5%). Value unlocking from the demerger and potential strategic sales of the steel plant (could add Rs. 30-32/share to NMDC’s valuation as the street is ascribing only 50% value to CWIP of Rs. 18,560 crore). Hence, we maintain our Buy rating on NMDC with a revised PT of Rs. 205. We highlight here that likely stake dilution by the government through OFS could act as an overhang on NMDC’s stock price in the near term.

Key Risks

A sharp fall in the domestic and international iron ore price, potential delay in volume pick-up, and royalty premium of more than 22.5% in future for mine lease renewals could impact earnings and valuation. Delay in demerger and strategic sale of the steel plant beyond FY2022 could impact value unlocking timeline.

Research report by Motilal Oswal

Valuation and view – NMDC is a play on strong iron ore prices and volumes. We expect a strong 14% volume CAGR to 43mt over FY21–23E, aided by the resumption of the Donimalai mines and increased volumes at Chhattisgarh. While the non-renewal of export contracts implies higher domestic volume sales – given the robust demand and iron ore shortage domestically – we expect NMDC would be able to increase volumes in the domestic market.

 NMDC’s average price in 1QFY22 is higher by 35% QoQ, which would result in EBITDA/t expansion despite a non-pass through premium of 22.5% coming into effect. However, NMDC’s EBITDA margins are likely to dilute due to royalties, and premiums now form ~40% of revenues (v/s ~18% earlier). We expect NMDC’s EBITDA to grow 77% YoY to INR156b in FY22E.

 We value the stock at INR215/share on SOTP, valuing the Iron Ore business at 5.0x FY23E EV/EBITDA. We add the value of the steel plant at 25% of the book value. At CMP, the stock is trading at 4.0x the core Iron Ore Mining business and provides an attractive dividend yield of ~13%. Reiterate Buy

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