NMDC share price rallied more than 3 percent intraday Friday after Motilal Oswal, with its buy rating, expects the stock to give 59 percent returns at Rs 180. It is betting on company's strong fundamentals with attractive valuations, though it sees some pricing pressure.
"At conservative 59 percent payout versus last five-year average of 79 percent, the dividend yield at 5.3 percent is attractive. Although there is near-term pressure on pricing, the volumes growth outlook remains robust due to the company's strong competitive advantage. Valuations are extremely attractive," it explained.
The business of country's largest iron ore producer, is strongly supported by robust demand growth from its key customers (JSW, Essar, RINL, etc.), high quality ore and strong supply chain.
Its sales increased by 24 percent to 35.6mt and adjusted EBITDA by 28 percent to Rs 4,500 crore in FY17. NMDC also rewarded shareholders with an impressive Rs 9,600 crore in the form of buyback and dividend.
However, reported PAT declined 23 percent YoY in FY17 as the company used the strong financial performance to clean its book aggressively, providing for around Rs 900 crore toward mine closures, capital assistance to the Indian Railways for track augmentation, and disputed debtors and service tax, which are not recurring in nature and do not impact cash flows.
Depletion of treasury after buyback also affected interest income and thus PAT, the research house said.
Motilal Oswal said it sees some pricing pressure but volume growth is strong.
Indian iron ore prices have softened over past few months in eastern India, as exports of ore and pellets declined due to volatility in the international market.
NMDC, too, has cut prices by Rs 200 per tonne w.e.f. July 1 2017.
Motilal Oswal said it has trimmed margins, but raised volumes estimates by 2.1mt to 40.1mt for FY19 as the operations remain strong; increased sales growth to 18 percent YoY in Q1FY18. As a result, it reduced EBITDA estimates by 5 percent to Rs 5,700 crore for FY19.
The recently commissioned pellet plant in Karnataka is getting stable and thus will add 1.2mt of volumes, it said, adding a modified pricing policy, which allows different regional pricing, has helped in strong volume growth.
Meanwhile, NMDC's board continues to pursue divestment at its steel plant and has appointed a banker.
Therefore, the research house believes that capital work in progress (CWIP) deserves at least book value. If Indian iron ore exports do not pick up, NMDC may need to take another price cut of Rs 200-300 per tonne, which can trim EBITDA by Rs 1,200 crore to Rs 4,600 crore.
At 12:30 hours IST, the stock price was quoting at Rs 116.05, up Rs 3.05, or 2.70 percent on the BSE.
Posted by Sunil Shankar Matkar
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