Buy NMDC; target Rs 140: Angel Broking
Brokerage house Angel Broking is bullish on NMDC and has recommended 'Buy' rating on the stock with a price target of Rs 140 in its research report dated July 08, 2013.
Angel Broking's research report on NMDC
"Steel demand has been lower-than-expected beginning 2HFY2013. Steel consumption grew by only 3.3 percent (multi-year low) in FY2013; steel and sponge iron prices started to decline from October 2012. Hence, NMDC had to lower its iron ore prices frequently to prevent inventory built ups. While prices of iron ore fines have been lowered by 6.7 percent, lump ore prices have been lowered by 27.5 percent since October 2012. Going forward, we expect lump prices to decline further by Rs 200/tonne in FY2014 given the weak demand scenario."
"NMDC aims to ramp up its production capacity to 48mn tonne by FY2015E (current capacity - 32mn tonne) through increased exploration of its existing mines and development of new mines, i.e., Bailadila 11/B, Kumaraswamy and Deposit 10 & 11/A. However, given the anticipated low steel demand, we expect sales volumes to grow by 6.9 percent yoy and 7.1 percent yoy in FY2014 and FY2015, respectively."
"During FY2013, NMDC has stepped up its dividend payout to 44 percent (25 percent in FY2012) despite 12.7 percent de-growth in EPS during FY2013. Given the cash-rich balance sheet, high visibility on operating cash flows, limited capex on mine development we opine that stepping up dividend payout is a right strategy by the company; it augurs well for minority shareholders implying a dividend yield of 6.8 percent at CMP. Further, with cash balance of Rs 21,025cr (as on March 31, 2013) and low capex requirements, we expect dividend of Rs 7/share to continue during FY2014-15. High dividend yield is likely to support the stock price in our view."
Outlook and valuation: "Over the past five years, NMDC has traded at an average EV/EBITDA of 12.0x, compared to its current valuation of 2.5x FY2015E EV/EBITDA. Strong balance sheet, low cost of production, high-grade mines, long mine life and high dividend yield (6.8 percent at CMP) make NMDC an attractive bet at the current levels. Valuing the stock at 4.5x FY2015E EV/EBITDA, we derive a fair price of Rs 140 and maintain our Buy rating on the stock," says Angel Broking research report.
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