The share price of NMDC has corrected significantly in the recent past on worries over the fall in global iron ore prices, regulatory issues in Karnataka and the implications of a new mining bill that requires sharing royalty at higher rates. However, after the correction of 33 per cent in the last one year, the stock is now trading at reasonable valuations, given the company's cost and market leadership in the domestic iron ore space, huge cash balance, high margins and its foray into steel making.
NMDC sells 80 per cent of its produce in the domestic market. However, of late, it is seeing some margin pressure led by falling iron ore prices. On the positive front, even as global ore prices were falling, the firm reported operating margins of 79.5 per cent in the September quarter. This is attributed to its low production costs of $23 a tonne, as against the world average of $48-50.
Analysts believe there is little scope for ore prices to fall from current levels, considering that many global players are operating at a very high cost of production — if prices fall beyond a point, it could lead to a shut-down of some global capacities. Besides, depreciation of the rupee against the dollar will further provide a cushion for margins. That apart, analysts are also confident of a rebound in volume growth for NMDC, as they expect its new mines based in Karnataka to contribute to overall production (the state is gradually giving permission to miners like NMDC to start production). "Last year, the company achieved production volumes of 26 mt, which this year will reach 30-30.5 mt. In this, major growth will come from the mines in Karnataka," says Abhisar Jain, analyst at Centrum Broking.
| STEADY GROWTH | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Sales | 11,369 | 11,991 | 13,861 |
| Ebitda (%) | 76.1 | 80 | 78.3 |
| Net profit | 6,499 | 7,510 | 8,368 |
| EPS (Rs ) | 16.4 | 18.9 | 21.1 |
| PE (x) | 10.3 | 8.9 | 8 |
| RoE (%) | 33.8 | 30 | 26.6 |
| EV/Ebitda (x) | 6.0 | 5.0 | 4.0 |
| E-Estimates Source: Centrum Broking | |||
NMDC, India's largest iron ore mining company, is sitting on a huge cash balance of Rs 20,000 crore. That apart, it recently revised its proven reserves to 2.1 billion tonnes, in addition to its plans to buy ore assets in overseas markets. This week, NMDC also announced that Australia's foreign investment review board has cleared its proposal to acquire 50 per cent stake in Legacy Iron Ore for Rs 96 crore. Analysts believe the mines have high quality iron ore reserves of 600 mt. Combined with its domestic ore reserves, these can suffice for 70-80 years at the current rate of production of 30 mt (as estimated in FY12).
Combined with huge reserves, cash and cost advantage, NMDC is leveraging its capabilities to establish a presence in steel making. It has started work towards setting up a three mt steel plant in Chhattisgarh and a two mt plant in Karnataka, which are expected to be commissioned between FY13 and FY14. The move is positive, as it will add to the overall returns. For instance, in FY11, the company earned a return (RoE) of 34 per cent on its shareholders’ funds of Rs 19,215 crore. With its steel foray, these returns are expected to rise further.
