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Jul 04, 2013, 06.44 PM IST | Source: Moneycontrol.com

Buy NMDC; target Rs 138: ICICIdirect.com

ICICIdirect.com is bullish on NMDC and has recommended buy rating on the stock with a target price of Rs 138 in its July 04, 2013 research report.

ICICIdirect.com research report on NMDC

"NMDC, a Navratna public sector enterprise, is engaged in mining iron ore, the key material used in steel manufacturing. NMDC is India's largest iron ore miner having access to superior quality iron ore assets with a reserve & resource (R&R) base of 1361 million tonne (MT) & average Fe content of ~64 percent. After subdued production growth in the past (CAGR of -1.8 percent in FY08-13), we expect iron ore production to perk up, going forward, on the back of impressive capacity expansion and relatively firm domestic demand. Going forward, we anticipate production and sales will grow at a CAGR of 5.8 percent and 6.8 percent, respectively, in FY13-15E. The stock has been under pressure in the recent past on the back of the overhang surrounding the company's investment in the steel business and a steady drop in iron ore lumps realisation. However, we feel the present overhang is overdone. Going forward, we believe, iron ore sales volume pick-up, healthy dividend payout ratio (~44 percentin FY13) and inexpensive valuations (quoting at FY15E EV/EBITDA of 3.3x and FY15E P/BV of 1.2x) turn the risk-reward trade-off favourable for NMDC."

"The company has undertaken a capacity addition programme wherein it is on track to exit FY15 with a mining capacity of 48 MT from 32 MT in FY13. The plan includes increasing the existing capacity of Bacheli Complex in Chhattisgarh from 15 MT to 17 MT, a new mining block in Kirandul complex, Chhattisgarh (capacity :7 MT) and a new mining block in Kumaraswamy, Karnataka (capacity :7 MT). It has also been working on a plan to augment its excavation capacity by increasing the rake loading capacity. NMDC is also mulling over a dedicated slurry pipeline with its major customers that will provide further fillip to its sales volume."

"Concentration of majority of output at two mining complexes (Kirandul and Bacheli accounted for ~70 percent of total production volume in FY13), high level of mechanisation and access to an inexpensive labour force aid NMDC to keep its costs in check. As a result, NMDC's cost of production at USD18-22/tonne (including royalty) is one of the lowest in the world as compared to its global peers (CoP in the range of USD22-64/tonne)."

"NMDC has robust balance sheet with a healthy liquidity position (cash as of FY13 end at Rs 21025 crore). We have modelled an iron ore sales volume of 28.4 MT in FY14E and 30 MT in FY15E. We have incorporated MMDR bill impact in our FY15E assumptions. We have valued the stock at 5x FY15E EV/EBITDA and given a 50 percent discount to CWIP in steel plant, thus arriving at a target price of Rs 138. Possession of superior quality iron ore reserves, the company's position in the lower quartile of the iron ore cost curve & dominance in domestic market reiterate our positive stance. We initiate coverage on NMDC with a 'Buy' rating and a target price of Rs 138," says ICICIdirect.com research report.

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To read the full report click here

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