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Alpha | NMDC Ltd. – Equity Research Desk

April 8, 2024 . Equities Desk

Alpha . Equity Research

NMDC Ltd. – India’s largest iron ore producer

Established in 1958, NMDC Limited, a Navratna Public Sector Enterprise (PSE) operating under the aegis of Ministry of Steel, is the country’s largest and world’s sixth largest iron ore producer. Headquartered in Hyderabad, NMDC operates four iron ore mechanized mines viz., Bailadila Iron Ore Mines – Kirandul Complex (Dep-14, 14 NMZ, 11B & 11C), Bailadila Iron Ore Mine – Bacheli Complex (Dep-5,10 & 11A) in the Chhattisgarh State, Donimalai Iron Ore Mine and Kumaraswamy Iron Ore Mine in the Karnataka State. The company is contributing to around 16% of domestic iron ore production (excluding captive iron ore production). NMDC is also the only organised producer of diamond in India from its Majhgawan mine at Panna, Madhya Pradesh. In a pursuit to expand its business globally, the company has acquired 90.05% (as of 31 March 2023) stake in Legacy Iron Ore Ltd, Australia.

Products and Services

The company has extensive experience in exploring and extracting various minerals, including iron ore, copper, rock phosphate, limestone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite, beach sands etc.

Subsidiaries: As of FY23, the company has 5 subsidiaries, 4 associate and 4 joint venture companies.

Key Rationale

Growth plans – To augment the production and to improve the quality of product mix from Bailadila Sector, the schemes like SP (Screening plant)-III Kirandul, New Crushing Plant of Dep.14 & 11/C and Downhill conveyor, additional screening lines in Bacheli, Rapid Wagon Loading System (RWLS) etc. are envisaged. The company has applied for EC extension of 5 MTPA at Deposits 14 and 11C. For few other deposits, NMDC has applied for 10% EC extensions which management expects to receive without a public hearing and with approximately 6 month timeframe. To enhance the operations, company is investing in many projects such as slurry pipeline, associated beneficiation plant (expected to reduce transit cost and dependence on railways) etc.

Diversified operations – NMDC is diversifying its operations beyond exploration and mining. The company has invested in the construction of a 3 MTPA integrated steel plant in Chhattisgarh (now demerged as a separate legal entity as NMDC Steel Limited) and a 1.2 MTPA pellet plant in Karnataka. It has also ventured into the mining of coal through the allocation of two coal blocks in Jharkhand on nomination basis by the Government of India.

Q3FY24 – During the quarter, the company earned revenue of Rs.5,410 crore, an increase of 45% compared to the Rs.3,720 crore of Q3FY23. EBITDA improved by 76% from Rs.1,141 crore of Q3FY23 to Rs.2,007 crore of the current quarter. The company reported net profit of Rs.1,482 crore, a growth of 62% compared to the corresponding period in the previous year. NMDC could achieve higher than expected increase in average realisation as the company had taken price hikes during the quarter. The company was able to achieve a significant volume driven growth in turnover during 9MFY24.

Financial performance – The company has generated revenue and PAT CAGR of 15% and 9% over the period of 3 years (FY20-23). Average 3-year ROE & ROCE is around 28% and 37% for FY20-23 period. The company has robust capital structure with a debt-to-equity ratio of 0.09.

Industry

Mining industry has the potential to significantly impact GDP growth, foreign exchange earnings, and give end-use industries like building, infrastructure, automotive, and electricity a competitive edge by obtaining essential raw materials at reasonable rates. Demand for iron and steel is set to grow as the government’s augmented focus on infrastructural development continues with increased construction of roads, railways, airports, etc. India is the second-largest producer of crude steel in the world and also the fourth-largest iron ore producer in the world. The nation is also the largest sponge iron (DRI) and fourth largest iron ore producer in the world. All these factors are expected to drive the steel demand via-a-vis iron ore demand in future.

Growth Drivers

The government plans to monetize assets worth Rs.28,727 crore (US$ 3.68 billion) in the mining sector over 2022-25.

100% FDI through automatic route in the mining sector.

Indian government’s initiatives and schemes such as Gati Shakti Master Plan, Make in India, Pradhan Mantri Awas Yojna – Housing for all, Urban Infrastructure development scheme for small and medium towns is expected to foster the growth of Metals and Mining sector in India in the next few years.

Competitors: Vedanta Ltd, Lloyds Metals & Energy Ltd etc.

Peer Analysis

In comparison to the above competitors, NMDC is the most undervalued stock with healthy returns on the capital employed and stable growth in sales.

Outlook

NMDC has a comprehensive strategic management plan to enhance its iron ore production capacity to 67 MTPA by FY26 and further to 100 MTPA by FY30 to meet the growing requirements of iron ore on the Indian steel sector. The strategy focuses on growth is largely through brownfield expansion of existing mines and improving the evacuation infrastructure. The company had given a volume guidance of 47 MT (million tonnes) for FY24, positive on achieving this target subject to Kumaraswamy enhancement approval. It has also given a volume guidance of 50-51 MT for FY25 and there could be a capacity constraint for two years for any significant addition. The capex guidance of Rs.1,750-Rs.1,800 crore for FY24 and the company is progressing well to achieve it having spent Rs.1,500 crore till January FY24. Capex guidance for FY25 is at Rs.2,000-2,100 crore through internal accruals. The company has a cash balance of Rs.15,500 crore at the end of Q3FY24. Earnings outlook remains strong with a considerably stable price undertaken during the quarter.

Valuation

We expect NMDC Ltd. to benefit from the strong demand for steel in the domestic market because of the strong push from government for infrastructural development. We recommend a BUY rating in the stock with the target price (TP) of Rs. 263 12x FY25E EPS.

Risks

ESG risk – The company is subject to the inherent ESG risk the mining sector is exposed to. The management must be cautious of any ESG risk that may affect their ability to raise capital, obtain permits, work with communities & regulators.

Permitting risk – It takes longer periods to secure permits needed to commence operations in areas with stringent environmental regulations, impacting the volume and production estimates.

Recap of our previous recommendations (As on 05 Apr 2024)