Offers growth and value

The share price of NMDC, which has lagged the broader markets in the last one year, has seen some uptick in the recent past. While the recent rise in iron ore prices is the key reason, news about the company being close to acquiring mines in international markets has added to the sentiments. Notably, demand for iron ore in India also remains healthy while supply is a constraint, for now, due to the ban on mining. For NMDC, which had cut prices last year, the latest price hike has led analysts to revise upwards their estimates for FY13.

Meanwhile, the stock, at Rs 165 (up five per cent in April), is trading at eight times its FY13 earnings, wherein valuations look attractive, given that NMDC is the world’s lowest-cost producer of iron ore, with operating profit margin of 76 per cent and return on equity of 34 per cent. More important, it has huge high-quality iron ore reserves. It is also a zero debt company, has a consistent dividend payout record and reasonable earnings visibility. Valuations look more attractive if one adjusts for the Rs 20,725 crore worth of cash or 30 per cent of its market capitalisation in its books.

Realisation gains
NMDC was forced to slash the prices of iron ore fines by about 20 per cent around December 2011, due to pressure from international iron ore prices. This added to its woes, in addition to the worries on account of the volume growth. However, NMDC recently raised iron ore prices by about 10 per cent in the domestic market, where it sells almost 80 per cent of the produce. NMDC is benefiting now from the shortage of iron ore in the country at a time of strong demand from the steel industry. Analysts believe a 10 per cent hike in iron ore prices could add six per cent to its realisation in FY13 to Rs 4,230-4,250 per tonne and another 8-10 per cent to its FY13 estimated earnings, which earlier stood at Rs 19 a share.

STABLE GROWTH
In Rs crore	FY11	FY12E	FY13E	FY14E
Sales	11,369	11,264	12,000	13,290
Ebitda	8,643	8,972	9,459	10,490
Ebitda (%)	76.0	80.0	79.0	78.9
Net profit	6,499	7,308	7,789	8,820
EPS (Rs )	16.4	18.4	19.6	22.2
PE (x)	10.5	9.4	8.8	7.8
E: Estimates                                                          Source: Analyst reports

Volumes: A key trigger
Here on, realisations may not improve dramatically, especially if domestic supplies improve as clarity (read: lifting of ban on mining) emerges on some of the mines, which were closed. Hence, the key to growth and re-rating of the stock could come from the utilisation of the cash in the books and improvement in volumes. In November 2011, supplies from NMDC to Essar Steel were impacted after the damage to the pipeline. This led analysts to lower their sales volume target from 31 million tonnes in FY13 to 29 million tonnes. However, the company is now confident of achieving 30-31 million tonnes in the current fiscal.

Among various measures is its plan to enhance supplies to Essar Steel through increased use of the rail network. It will also increase the evacuation capacity by three million tonnes to tackle the piling up of iron ore. Steps like improving rail availability at the Karnataka mines and supplying more iron ore to the Chhattisgarh sponge iron manufacturers could help improve volumes, which are critical for growth. If the company is able to achieve its targeted volumes, it could lead to upgrades, since analysts are estimating just six per cent growth in revenue and earnings, which do not factor in the recent increase in iron ore prices by the company.