NMDC: Transitory higher royalty rate drives EBITDA miss; Valuations compelling; Maintain Buy
(NMDC IN, Mkt Cap USD6.1b, CMP INR137, TP INR215, 55% Upside, Buy)
3QFY18 adj. EBITDA grew 4% QoQ (down 6% YoY) to INR13.3b, below our estimate of INR15.4b on marginally lower realization and higher royalty expenses which is transitory. EBITDA is adjusted for (a) rail line doubling payment of INR453m and (b) expected credit loss of INR762m, which are non-recurring. Adj. PAT grew by 2% QoQ to INR9b (est. 10.6b).
- Sales declined 3% QoQ (-20% YoY) to 8.1mt due to railway line disruption which has since been resolved. Production grew 19% QoQ (-12% YoY) to 8.6mt.
- Domestic realization increased 5% QoQ to INR2,967/t (est. INR3,048/t).
- EBITDA per ton increased INR103/t QoQ to INR1,652/t.
Valuations compelling; Maintain Buy
- Domestic iron ore miners are re-gaining pricing power amid improving demand and disruption in domestic iron ore supply. NMDC has increased fines and lump prices by ~INR600-700/t QoQ in 4Q. Defaulting miners have paid the penalty and could soon restart production. We are already building in realization to decline by ~INR500/t from 1QFY19 on expectation of improving supply. However domestic demand scenario remains favorable.