Volume and realisations to support NMDC's growth

The recent correction of around 13% in NMDC from its 52 week highs of Rs 148.90 on 10 February '14 due to weak global iron-ore prices offers good entry opportunity for investors.

The company is likely to see stable prices for its iron-ore produce looking at short supply of the commodity in India. After Karnataka and Goa bans on iron-ore mining, Shah Commission's recommendations in Orissa are likely to keep iron-ore mining under check in the state.

With this as risks to realisations remain limited; it is volume growth that can drive company's revenues and profitability further. Analysts also feel that stock price currently is not even factoring in the good dividend yield (around 6%) and the strong cash on books (Rs 57 a share).

Analysts at IDFC Securities observe that there could also be a positive EBITDA surprise from the capex undertaken (in-motion weigh bridge for improving railway rake availability, 1.2 mtpa pellet plant, etc). While they have target price of Rs 153, consensus target price as per 28 analyst polled by Bloomberg since February stands at Rs 157 for the stock trading at Rs 130 levels.

Domestic Iron-ore prices -Limited downside

Over the past two months, international iron ore prices have declined from $135 a tonnet to $105 a tonne (down 22%). In India, domestic iron prices are generally at significant discount to international prices in the back of 30% export duty on iron ore exports.

Thus the decline in international prices should not lead to decline in domestic iron ore prices feel analysts at Ambit Capital. In fact the company that reviews prices of iron-ore every month has kept the March'14 prices at February's levels of Rs 4,500 a tonne for lumps and Rs 2,910 a tonne for fines.

The Shah Commissions observations on Mining in Orissa taking into consideration facts as Environmental sustainability, transparency through measures such as e-auctions, higher control and a cap on iron-ore mining etc can lead to iron-ore mining from the state remaining under check. Analysts at Kotak Institutional Equities feel that measures as capping iron ore production in the state will lead to tighter domestic supplies.

Analysts at Antique say that overall Domestic iron ore production has declined 10.6% CAGR from FY09 to FY13 levels of 136MT, leading to tightness in domestic supply. The Shah commission is likely to recommend further restrictions on annual output from Odisha mines to 50-55mtpa from FY13 production levels of 64mtpa and possible ban/restriction on iron ore exports.

The capacity additions in the Steel sector will further bode well for the iron-ore demand and support prices in the country. Out of 28 mtpa capacities being added in the Fy14-16. 7 MTPA have no captive iron-ore supplies which will be positive for NMDC feel analysts at Antique.

Volume Boost

NMDC that ended FY13 with a production of 26.3MT is likely to see better volumes moving forward till FY16. It has already seen iron ore production of 26.4 million tonne (MT) for April 2013-February 2014.Iron ore sales during the period have been at 27.4 MT during this period compared to 23.4 MT during the same period in the last fiscal (FY13). Analysts at ICICI securities feel that the company should easily achieve our FY14E iron ore sales assumption of 29.4 MT.

The growing productions & sales of iron ore bodes well for the company. The company's volumes are likely to see compounded annual growth rate of 9% during FY13-16E feel analysts at IDFC. The company's mines in Karnataka and Western India (Chhattisgarh and Orissa) are seeing ramp-up. While Analysts are looking at ramp-up from Deposits 11B in West India, the starting of Essar Slurry pipeline will provide good boost to volumes.