PL Stock Report: NMDC (NMDC IN) - Q2FY24 Result Update – Volume growth to continue; prices should follow - ACCUMULATE

NMDC (NMDC IN) - Tushar Chaudhari - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs169 | TP: Rs176

Q2FY24 Result Update – Volume growth to continue; prices should follow

Quick Pointers:

§ Strong 15% volume growth in 2Q; the growth rate would continue in 2HFY24; expect 50mt in FY25 as production from Kumaraswamy & Bacheli would start.

§ Price hikes are expected in 3Q which would support 2H EBITDA margins.

NMDC Limited (NMDC) 2QFY24 EBITDA declined 40% QoQ to Rs 11.9bn (up 39% YoY) on higher than expected decline in realization as pricing cuts were front loaded during monsoon quarter. Going forward we expect NMDC to take price hikes while 15%+ volume growth should continue in 2H. We maintain our 46/50mt volume estimates while raise FY25E iron ore realization from Rs 4,350/t to Rs4,512/t as mgmt. is confident of raising prices in the current month. Mgmt. is also confident of receiving final clearance on Kumaraswamy EC extension by 2.28mt in next few days which can lead to 47-49mt iron ore production in FY24E.

NMDC is well placed to capitalize on strong volume growth in domestic steel markets over next two years given a) its increased focus on mining business expected to deliver strong 11% CAGR over FY23-26E to ~53mt iron ore volumes; b) doubling of railway line for evacuation and higher availability of rakes to support iron ore volume growth; c) other high margin minerals to constitute ~10-15% of revenue in next 5 years. We raise FY25 EBITDA estimates by 9% on expectation of price hikes in 2H as global iron ore prices are hardening, domestic steel demand remains strong and NMDC has not taken effective price hikes since May’23. We expect Revenue/EBITDA/PAT growth of 12%/15%/14% over FY23-26E. At CMP, stock is trading at 5.5x/4.2x EV of FY25E/FY26E EBITDA. Retain ‘Accumulate’ rating with revised TP of Rs176 (earlier Rs147) valuing at 5x EV of Sept 2025E EBITDA, as we roll forward.

Higher than expected decline in realization: NMDC’s 2QFY24 EBITDA declined 40% QoQ to Rs 11.9bn (up 39% YoY; lower than PLe Rs 13.3bn) on higher than expected decline in realization. Revenue declined 26% QoQ to Rs 40.1bn (up 21% YoY; PLe 46bn) on weak realization amidst seasonally weak quarter. The average realization (Rs 4,147/t) is weaker than expected as pricing cuts were front loaded during monsoon quarter.

Higher royalties to impact EBITDA: EBITDA per ton declined 31% QoQ to Rs1,230/t (Vs PLe Rs1,377; up 21% YoY) as operating and employee costs per ton was higher QoQ. Royalty & cess per ton was lower 25% QoQ as production was lower during 2Q. PAT declined 38% QoQ to Rs 10.3bn (up 15% YoY; tad better than PLe Rs 989bn) on account of higher other income. Going forward as volumes and prices increase gradually, EBITDA/t would improve to ~Rs1,500/t in FY25E.

Concall highlights: (1) Bacheli capacity to be augmented by 2mtpa in next 7 days while final clearance for Kumaraswamy mine for 2.28mpta expansion is expected to be received in few days. (2) FY24 capex guidance has been revised to Rs18-20bn from Rs16bn earlier and FY25 capex is expected to be Rs22-23bn. (3) 1H capex stood at Rs10.08bn. (4) NMDC has appointed consultants for expanding output to 100mt and develop customized products. (5) Capex for screening plant II at Donimalai will be Rs10bn and for conveyor belt and crushing plant in Kirandul is Rs14bn. (6) FY25 production range can be in the range of 52-53mt and then there will be capacity constraint for two years. (7) NMDC has commissioned a gold mine of 1tpa production capacity in Australia and it also has 6 gold resources around where exploration will start in 12-18 months. (8) NMDC is doing PFS along with Hancock at their magnetite and lithium deposits. The magnetite reserves are superior grade 1.5bn tons, in first phase NMDC plans 10mtpa capacity scalable to ~30mtpa. (9) Rohne semi-coking coal project of 8mtpa is expected to be commissioned in 18-24 months. (10) In next 5 years, NMDC expects ~10-15% revenue from non-iron ore mineral; NMDC has shortlisted 7-8 minerals such as Bauxite, gold, lithium, copper which would require lesser processing for merchant miners like NMDC. (11) Fine to lump recovery is 70%:30% while mgmt. expects fines demand to increase substantially in next decade. (12) Top three customers take 70% of NMDC’s volumes viz. JSTL, AM-NS (~8mt) and RINL (~7mt) (13) NMDC Steel is expected to consumer 4-5mt of iron ore; NDMC Steel is running at 40-45% capacity utilization as of now.

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