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  • Stock recommendation: NMDC Ltd — Reduce — Target price Rs 120

    Publish date: August 9, 2018

    Results update: A good quarter aided by lower costs

    State-run National Mineral Development Corporation (NMDC) had a better quarter than anticipated.

    The low volumes are a concern, but the merchant miners beat estimates to register positive EBITDA and net profit numbers.

    A resilient quarter notwithstanding, the company’s reliance on a few large steel mills and low export volume are reasons enough for us to remain skeptical.

    Key highlights

    • The company’s net income before a few deductions (EBITDA) shrunk by 5% (YoY), but we expected it to be worse. The EBITDA numbers were better due to decline in other expenses such as provisions need to shutter mines and expected credit loss.
    • The company’s standalone net income grew by 1% (YoY), which was higher than our estimate.
    • The miner’s volumes took a hit though. A few large steelmakers, especially in Karnataka, decided to import steel because NMDC cited a steep price. As a result, the Karnataka volumes was 74% down this quarter.
    • The company’s net export realizations were on the lower end due to high freight cost and export duty. Low exports have resulted in a stockpiling of supplies in the Indian market, which will put pricing pressure on domestic iron-ore.
    • Market pressures may compel NMDC to lower its steel price. That’s because west coast-based steel mills see more value in exporting steel than buying it from NMDC.

    Valuation & outlook

    The current fiasco in Karnataka shows how merchant miners are over-reliant on a few steel mills.

    The government’s decision to auction iron-ore mines in India will further weaken NMDC’s position in the market.

    Another worry for us is that NMDC has invested close to $3 billion in a steel plant, an area in which it has little operating experience.

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