Analyst Corner: Retain ‘buy’ on NMDC with a target price of Rs 129

Reiterate buy on valuations despite risk of higher levies. NMDC’s volume outlook has strengthened further with the resumption of Donimalai mine expected by December-end. Strong volume trend (sales of 3.3 MT in Nov 20, up 18% y-o-y), coupled with strong iron ore pricing (hike of Rs 500/t in Dec 20), should drive near-term earnings. Resumption of the Donimalai mine should drive 11% Ebitda growth in FY22E on the back of a 18% volume growth. We reiterate our buy on NMDC with a TP of Rs 129/share on valuation support despite the risk of government levies. The ministry of mines has approved the premium levy (22.5%) on Donimalai mine, temporarily over-riding the MMDR Act, 2015 to address the shortage of iron ore supply. However, the final premium would be decided by a committee that would review Mineral (mining by government company) Rules, 2015.

Earlier in Sept 20, the Karnataka government allowed NMDC to start the mine on the above terms. Post this approval, NMDC would be able to re- start operations that came to a halt in Nov 18. It would have to pay 22.5% of the IBM determined average sale price of iron ore. The Centre would constitute a committee to decide the premium payable by PSUs for future renewals. This implies that the renewal of 7 MTPA Kumaraswamy mine, due in Oct 22, would be at a premium as decided by the central government committee. The Chhattisgarh government could also demand a similar premium on mines, which were renewed in 2019, posing another risk.

We expect NMDC to restart operations from the Donimalai mine by December end and accordingly raise our FY21E/FY22E volume estimate by ~3%/16% to 31.3MT/37MT.

However, incremental Ebitda contribution from Donimalai mine would be lower due to levy of 22.5% premium. We expect Ebitda to grow ~11% CAGR over FY20-22E despite a volume/realization CAGR of 8%/~5%. We see NMDC as a second order beneficiary of an improving domestic steel demand and prices. NMDC has raised prices by Rs 500/t for Dec 20 leading to cumulative hikes of Rs 2,250/t over last five months. We expect 2HFY21 Ebitda to ~60% higher y-o-y at Rs 50.8b on strong pricing.

The government’s proposal to levy a premium on NMDC on its mining leases has emerged as a key overhang on the stock. If a premium of 22.5% of revenue is levied on all of NMDC’s mines, it poses a downside risk of ~25% to our FY22E Ebitda.

We value the stock at Rs 129/share on a SoTP basis – 4x FY22E EV/Ebitda for its core iron ore mining business and ~25% book value for the Nagarnar plant. At the CMP, the stock is trading at 2.8x its core iron ore mining business. Reiterate buy on strong earnings and valuation support.