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14 Sep 2023

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NMDC Ltd



NMDC is India’s largest iron ore producer operating from a total of four iron ore mechanised mines in Chhattisgarh and Karnataka state. Removal of export duty in mid-November 2022 and opening of China in early January 2023 will provide growth momentum over FY2023-FY2025E. We have upgraded our rating to Buy with a revised price target (PT) of Rs. 145.
* China’s COVID-19 Unlock: China in a major shift of its coronavirus response policies announced that COVID-19 management will be downgraded from Class A to B effective from January 8, 2023. The country’s focus will now be to only control severe cases and take necessary steps to curb the spread of the virus. China has scrapped quarantine measures for inbound travellers and they will be required to only show a negative RT-PCR test within 48 hours of departure. The opening is in-line with the projections, but the pace of it is well ahead of expectations. The virus has been renamed from COVID-19 pneumonia to COVID-19 infection. These measures taken to boost GDP growth of China will lead to higher production of steel, which will increase demand for iron ore and improve capacity utilisation for NMDC.
* Expect improvement in iron ore prices: Post the export duty withdrawal on iron ore, pellet, and steel by the government, NMDC has rolled back the Rs. 300 price cut it took on lumps and fines on November 17, 2022. In November 2022, NMDC’s iron ore sales increased by 5.6% y-o-y to 3.04 MT and India’s crude steel production increased by 5.7% y-o-y to 10.4 MT. Chinese steel production for November 2022 increased by 7.3% y-o-y to 74.5 MT and India’s iron ore exports reported a sharp increase of 131% m-o-m to 0.3 MT post the removal of export duty by the government. Domestic flat and long prices have been range-bound in Q3FY2023. At current prices, NMDC fines are at a 67% discount to international iron ore prices versus long-term average of 40%. All these factors show steady steel demand, which would help in the pricing of iron ore and, hence, would be positive for NMDC.
* Demerger of the steel business: MCA has approved the demerger of the steel business to NMDC Steel Limited vide its order dated October 6, 2022. This will add value to the company’s stakeholders by disinvestment of NMDC Steel Limited to a strategic buyer. Since the core mining business is not capital intensive, we expect higher free cash flows and increased dividend pay-out ratio by NMDC in the future.

Our Call
Valuation – Upgrade to Buy with a revised PT of Rs. 145: The recent withdrawal of export duty on steel/iron ore/pellet and reopening of China will lead to higher prices for iron ore and improved volume growth, which will improve the profitability of NMDC. Demerger of the steel business will reduce capital intensity and improve dividend pay-out ratio. At the CMP, we expect dividend yield of 8.5% for FY2025E. We upgrade our rating to Buy with a revised price target (PT) of Rs. 145 at a target multiple of 4.3x its FY2025E EBITDA.

Key Risks
1) Decrease in iron ore prices and demand and imposition of steel/iron ore/pellet export tax are critical downside risks and vice-versa. 2) Increase in Covid cases and extension of China reopening.

Investment theme
We expect domestic iron ore prices to improve, given the recent government decision to withdraw 15%/50%/45% export duty on steel/iron ore/pellets to control inflation. Rise in prices and strong volume growth will improve the valuation for NMDC.



Price Target: 145

Refer: NMDC for more details.