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Dec 12, 2012, 01.18 PM IST | Source: Moneycontrol.com

Buy NMDC; target Rs 192: Motilal Oswal

Motilal Oswal is bullish on NMDC and has recommended buy rating on the stock with a target price of Rs 192 in its December 11, 2012 research report.

Motilal Oswal is bullish on NMDC and has recommended buy rating on the stock with a target price of Rs 192 in its December 11, 2012 research report.

The promoters (government of India) of NMDC have issued a notice of offer for sale (OFS) of 397m shares or 10% of its equity. Allocation will be on price priority basis at multiple clearing prices as per the relevant SEBI OFS circular.

Floor price has been fixed at INR147/share, valuing the issue at INR58.3b. Sales will be executed within the trading hours on 12 December.

After investors take up the offer, NMDC's free float will increase to a meaningful 20%. NMDC will have the largest market capitalization in the Indian metals and mining sector. There is also a reasonable chance of it finding its way into the benchmark indices.

Based on the floor price, the stock is available at an attractive 7x FY14E EPS and an EV of 3.6x FY14E EBITDA. Our target price is INR192 (EV of 5x FY14E EBITDA), implying 31% upside from the floor price.

We expect NMDC’s iron ore volumes to grow at a CAGR of 13% to 39mtpa over FY12-15, with (1) easing logistics bottlenecks, (2) CEC permission for forward sales in Karnataka, and (3) increase in capacity to 47mtpa by the end of FY14.

Investments in pelletization capacities in India will lead to acceleration in demand and, in turn, higher prices for iron ore fines, which constitute ~65% of NMDC’s product mix. Unlike its global peers, NMDC should witness an uptrend in its average iron ore realizations, helping to keep its margins resilient.

While globally, the iron ore business is facing a slowdown, strong domestic demand coupled with constrained supply has improved fundamentals of Indian iron ore miners like NMDC that have high quality assets, best mining practices and integrity. Its assets in Karnataka have remained unscathed while every private mine was closed due to blanket mining ban imposed by the Supreme Court in July 2011.

Since NMDC sells iron ore to steel manufacturers, who are able to price their products freely, we do not expect government interference in ore pricing. We expect its iron ore realizations to reflect domestic market price dynamics. NMDC is better placed than Coal India to realize the full potential of its assets.

NMDC has been consistently stepping up dividend payout, which will help in improving RoE and total stock returns. It doubled its first interim dividend
for FY13 to INR2/share. In FY12, NMDC had paid out INR4.5/share, implying a payout ratio of 26.1%. We expect total dividend of INR5.5/share in FY13, implying a payout ratio of 35.5% and dividend yield of 3.5%.

NMDC has a strong balance sheet with cash surplus of INR225b and is well positioned to further step up dividend payout, despite INR155b capex for setting up the 3mtpa steel plant at Nagarnar, Chhattisgarh.

Though investment in the steel business will generate low IRR of 5.6%, resulting in a negative NPV of INR21/share, the iron ore business enjoys NPV of INR279/ share. Thus, the total NPV works out to INR258/share. Our target price for NMDC is INR192 (EV of 5x FY14E EBITDA).

After investors take up the offer for sale (OFS), NMDC’s free float will increase to a meaningful 20%. NMDC will have the largest market capitalization in the Indian metals and mining sector. There is also a reasonable chance of it finding its way into the benchmark indices. Based on the floor price, the stock is available at an attractive 7x FY14E EPS and an EV of 3.6x FY14E EBITDA. Our target price implies 31% upside (Rs 192) from the floor price. Reiterate Buy.

Institutional holding more than 40% in Indian cos

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