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July 4, 2013
ICICI Securities Ltd|Retail Equity Research
nitiating Coverage
Iron man: Only man that will stand tall....
NMDC Ltd (NMDC), a Navratna public sector enterprise, is engaged inmining iron ore, the key material used in steel manufacturing. NMDC isIndias largest iron ore miner having access to superior quality iron oreassets with a reserve & resource (R&R) base of 1361 million tonne (MT) &average Fe content of ~64%. After subdued production growth in thepast (CAGR of -1.8% in FY08-13), we expect iron ore production to perkup, going forward, on the back of impressive capacity expansion andrelatively firm domestic demand. Going forward, we anticipate productionand sales will grow at a CAGR of 5.8% and 6.8%, respectively, in FY13-15E. The stock has been under pressure in the recent past on the back ofthe overhang surrounding the companys investment in the steel businessand a steady drop in iron ore lumps realisation. However, we feel the
present overhang is overdone. Going forward, we believe, iron ore salesvolume pick-up, healthy dividend payout ratio (~44%in FY13) andinexpensive valuations (quoting at FY15E EV/EBITDA of 3.3x and FY15EP/BV of 1.2x) turn the risk-reward trade-off favourable for NMDC. Weinitiate coverage on NMDC with a BUY rating and a target price of | 138.Iron ore mining expansion on track, production & sales to rebound.The company has undertaken a capacity addition programme wherein itis on track to exit FY15 with a mining capacity of 48 MT from 32 MT inFY13. The plan includes increasing the existing capacity of BacheliComplex in Chhattisgarh from 15 MT to 17 MT, a new mining block inKirandul complex, Chhattisgarh (capacity :7 MT) and a new mining blockin Kumaraswamy, Karnataka (capacity :7 MT). It has also been working ona plan to augment its excavation capacity by increasing the rake loadingcapacity. NMDC is also mulling over a dedicated slurry pipeline with itsmajor customers that will provide further fillip to its sales volume
Low cost of production ensures healthy margins & steady cash flow
Concentration of majority of output at two mining complexes (Kiranduland Bacheli accounted for ~70% of total production volume in FY13),high level of mechanisation and access to an inexpensive labour force aidNMDC to keep its costs in check. As a result, NMDCs cost of productionat US$18-22/tonne (including royalty) is one of the lowest in the world ascompared to its global peers (CoP in the range of US$22-64/tonne).
Healthy liquidity position & robust balance sheet!!
NMDC has robust balance sheet with a healthy liquidity position (cash asof FY13 end at | 21025 crore). We have modelled an iron ore salesvolume of 28.4 MT in FY14E and 30 MT in FY15E. We have incorporatedMMDR bill impact in our FY15E assumptions. We have valued the stock at5x FY15E EV/EBITDA and given a 50% discount to CWIP in steel plant,thus arriving at a target price of | 138. Possession of superior quality ironore reserves, the companys position in the lower quartile of the iron orecost curve & dominance in domestic market reiterate our positive stance.
Exhibit 1:Key financials(Year-end March) FY11 FY12 FY13P FY14E FY15E
Net Sales (| crore) 11,361.0 11,243.3 10,558.7 10,134.4 11,282.0
EBITDA (| crore) 8,643.5 8,924.7 7,378.0 6,721.2 6,684.5
EBITDA Margin (%) 76.0 79.2 68.9 66.2 59.2
Other Income (| crore) 1,203.2 2,016.5 2,238.9 1,868.9 1,511.1
Depriciation (| crore) 120.4 130.2 138.5 153.3 205.6PAT (| crore) 6,500.1 7,265.4 6,355.6 5,568.3 5,273.4
EPS (|) 16.4 18.3 16.0 14.0 13.3
Source: Company, ICICIdirect.com Research
NMDC Ltd (NATMIN)
| 100
ing Matrix
ng : Buy
get : | 138
get Period : 12-18 months
ential Upside : 38%
Y Growth
oY Growth) FY12 FY13P FY14E FY15E
t Sales (1.0) (6.1) (4.0) 11.3
ITDA 3.3 (17.3) (8.9) (0.5)
t Profit 11.8 (12.5) (12.4) (5.3)
S (Rs) 11.8 (12.5) (12.4) (5.3)
rent & target multiple
FY12 FY13P FY14E FY15E
E 5.5 6.2 7.1 7.5
/ Net Sales 1.7 1.8 1.9 2.0
/ EBITDA 2.2 2.5 2.8 3.3
BV 1.6 1.4 1.3 1.2
NW 29.8 23.1 18.3 15.8
CE 36.0 26.3 21.5 19.4
ck Data
rket Capitalization | 39647 Crore
al Debt (FY13P) | 0 Crore
h and Investments (FY13P) | 21025.2 Crore
| 18621.8 Crore
week H/L 203 / 99
ity capital | 396.5 Crore
e value | 1
Holding (%) 11.9
Holding (%) 4.4
ce movement
80
100
120
140
160
180
200
220
Jul-13Mar-13Dec-12Oct-12Jul-12
,000
,500
,000
,500
,000
,500
,000
,500
,000
,500
Price (R.H.S) Nifty (L.H.S)
mparative return matrix (%)
mpany 1M 3M 6M 12M
MDC (14.8) (23.2) (38.5) (49.7)
al India (8.8) (1.4) (17.5) (16.7)
DC (17.2) (31.0) (43.1) (37.5)
sa (10.6) (5.7) (29.6) (26.2)
alysts namewang Sanghavi
shank Kanodia
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Company background
Incorporated in 1958, NMDC Ltd (NMDC) is a pioneer in the domesticmining industry. The company was established with the objective ofexploring domestic minerals and comes directly under the administrativecontrol of the Ministry of Steel. NMDC was conferred Navratna status in2008, thereby allowing the company to have greater financial autonomyand significant operational flexibility. In FY12, NMDC contributed 16.1% ofthe countrys total iron ore production amounting to 27.3 MT of iron ore.The company also operates the only mechanised diamond mine in Indiaand has a sponge iron facility with capacity of 65,000 tonne annually.NMDC has strong in-house capability to undertake exploration with highlymechanised operations with ISO 9001-2000 certified mines. NMDCsresearch and development centre, established in 1970, has competence inundertaking technology development projects in the field of orebeneficiation and mineral processing. For continuing explorationactivities, NMDC has set up a global exploration centre at Raipur,Chhattisgarh. Apart from iron ore, NMDC is developing a magnesite minein Jammu and Arki Lime Stone Project in Himachal Pradesh. A windmill
project (10.5 MW capacity) has also been completed and commissionedin Karnataka.
Exhibit 2:Overviews
Source: Company, ICICIdirect.com Research,
The tabs in orange indicate the proposed expansion capacity
NMDC
Iron ore
Capacity 32 MT
Sponge iron
Capacity 65,000 tonne
Diamonds
Capacity 100,000 carat
(Madhya Pradesh)
Chhattisgarh
Capacity 27.7 MT
Karnataka
Capacity 4 MT
Bacheli
Capacity 15 MT
Kirandul
Capacity 12.7 MT
Donimalai
Capacity 4 MT
Kumaraswamy
Capacity 7 MT
(Expansion in Progress)
Deposit -11C (0.7 MT)
Deposit 14 (5 MT)
Deposit 14NMZ (7 MT)
Deposit 5 (10MT)
Deposit 10 & 11A (5 MT)
Deposit 10 & 11A
Capacity addition 2 MT(Expansion in Progress)
Deposit 11-B
Capacity 7 MT
(Expansion in Progress)
Shareholding pattern (%) Q4FY13
Shareholder's Category Holding (%)
Promoters 80
Institutional Investors 16.2
General Public 3.8
FII & DII holding trend (%)
0.7 0.7 0.8 0.7 0.7 0.7
4.4 4.8
8.4 8.4 8.4 8.3 8.4 8.4
11.9 11.5
02468
101214
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
%
FII DII
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Indian iron ore industry
India is one of the leading producers of iron ore in the world with totalresources of 28.5 billion tonne. The country witnessed stagnantproduction growth in FY06-12 with production growing at a meagre 0.4%CAGR in FY06-12. Domestic consumption increased at a CAGR of 6.0%while during the same period iron ore exports de-grew at a CAGR of 6.0%resulting in flat production growth. Production reached a peak of 218.6MT in FY10 wherein iron ore export volumes stood at a record 117 MT.However, due to restriction in mining in some states (restriction wasimposed in Karnataka in July 2011 and in Goa in September 2012) andslower clearances, domestic iron ore output fell to 169.7 MT in FY12. Priorto the ban, Karnataka and Goa cumulatively accounted for ~35% of totalproduction and ~65% of the total iron ore exports. Furthermore,Government of India (GoI) has been frequently increasing the export dutyon iron ore lumps and fines so as to discourage the exports of iron ore.Export duty on both iron ore lumps and fines currently stands at 30%.
Exhibit 3:Domestic iron ore production, consumption & exports
165 1
88 2
13
213
219
213
170
140
76 9
4 119
108
102
115
108
125
89 9
494
105
117
98
62
15
0
50
100
150
200
250
FY06 FY07 FY08 FY09 FY10 FY11P FY12P FY13E
milliontonne
Production Domestic Consumption Exports
Source: IBM, Ministry of Mines, ICICIdirect.com Research
Exhibit 4:Domestic steel industry structure (Porter Five Forces)
Source: ICICIdirect.com Research
Bargaining power
of customers
(end users)
Threat of New
entrant
(Arcelor Mittal,
Posco, JFE
Threat of
Substitute
(Hindalco, Sterlite,
NALCO
Bargaining power
of suppliers
(NMDC)
Rivalry among
competitors
(Tata Steel, SAIL,
JSW Steel
High, given limited supply
amid prevailing mining
restrictions
Moderate, options available,
especially Chinese imports
Moderate, as investment under
automatic route allowed but
issues with land acquisition,
huge capital investments & high
gestation period
Moderate, aluminium
preferred for
automobiles but
expensive
Moderate as product
quality differentiation
exists
ian iron ore reserves (28.5 billion tonne)
Magnetite,
10.6 BT,
37%
Hematite,
17.9 BT,
63%
rce: IBM, Ministry of Mines
hematite reserves state wise (17.9 billion tonne)
others, 1, 6%
Goa, 0.9, 5%
Karnataka, 2.2BT, 12%
Chhattisgarh,
3.3 BT, 18%
Jharkhand,
4.6 BT, 26%
Odisha, 5.9
BT, 33%
rce: IBM, Ministry of Mines
ort duty structure over time
eFrame
Fines < 62% Fe
Content
Fines > 62% Fe
Content Lumps
ill Feb'07 Nil Nil Nilr'07 | 300/tonne | 300/tonne | 300/tonne
y'07 | 50/tonne | 300/tonne | 300/tonne
'08 15% 15% 15%
08 | 200/tonne | 200/tonne 15%
v'08 8% 8% 15%
'08 Nil Nil 5%
'09 5% 5% 10%
'10 5% 5% 15%
r'11 20% 20% 20%
'11 30% 30% 30% rce: IBM, Ministry of Mines, ICICIdirect.com Research
a iron ore production , pre mining ban (FY11)
Total Production 213 MT
29.2 36.7 23.237.9
76.4
9.6
020406080
100
Chhattisgarh
Goa
Jharkhand
Karnataka
Odisha
others
milliontonne
rce: IBM, Ministry of Mines
the listed space, NMDC is the only major iron ore supplier
mestically. The other player Sesa Goa is mainly into exports.
mestic iron ore production is also contributed by captive steel
nufacturers like SAIL, Tata Steel and JSPL among others
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Production
Iron ore production at NMDC has broadly remained stagnant in the past
five years with production reaching a peak of 29.8 MT in FY08 and a low
of 23.8 MT in FY10. The production was low in FY10 on the back of
damage done by Naxals to the slurry pipeline connecting NMDC with
Essar Steel (capacity 8 MT, 276 km). Production in FY13 stood at 27.2 MT,
thereby implying a capacity utilisation of 85%.
Production composition
The company produces iron ore, which is of two forms;
Lumps: They are concrete masses of iron ore, which need to be crushedbefore charging to the blast furnace. They usually have higher iron orecontent than fines and can be charged without any beneficiation. In FY13,iron ore lumps constituted 36% of NMDCs total iron ore production. Thecurrent basic selling price of lumps (Fe grade ~65%) for July 2013 is| 4400/tonne. The lump fetches greater margins for NMDC over fines.
Fines: Fines are iron ore masses, which have loose binding & need to bebeneficiated before being charged to the blast furnace. They are readilyused as feed for the sintering & pelletisation process. In FY13, iron orefines constituted 64% of NMDCs total iron ore production. The currentbasic selling price of fines (Fe grade~64%) for July 2013 is | 2510/tonne.
Exhibit 5:Iron ore production trend
29.8
28.5
23.8
25.2
27.3
27.2
05
10
15
20
25
30
35
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
milliontonne
Source: Company, ICICIdirect.com Research
Exhibit 6:and corresponding iron ore production mix (lumps: fines)
40 40 40 39 37 36
60 60 60 61 63 64
0
20
40
60
80
100
120
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
%
Lumps Fines
Source: Company, ICICIdirect.com Research
Exhibit 7:NMDCs Iron ore production bifurcation (state wise)
22.9 22.118.1
21.0 21.7 19.0
6.9 6.4
5.7
4.25.6
8.2
0
5
10
15
20
25
30
35
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
milliontonn
e
Chhattisgarh Karnataka
Source: Company, ICICIdirect.com Research
Exhibit 8:Production complexes descriptionS No Particular Remarks
1 Chhattisgarh
The east coast network of the Indian Railways connects the
state mines to Vizag Port from where it is further sent to either
domestic or international customers
1.a Bacheli
Over the last six years, production from this complex has been
stable in the range of 10.4 MT to 12.6 MT
1.b Kirandul
Muted volumes from this complex were on the back of damage
done by Naxals to the slurry pipeline connected to Essar Steel. It
was destroyed in July 2010 and again in October 2011
2 Karnataka
The south western network of the Indian Railways connects
state mines to nearby domestic customers. The company
produced in excess of its production capacity from its Karnataka
complex on the order by the Supreme Court of India
2.a Donimalai
The production output from the Donimalai mines has been on a
declining trend from 6.9 MT in FY08 to 4.2 MT in FY11
Source: Company, ICICIdirect.com Research
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Sales volumes
Sales volumes have been stagnant with a major dip in FY10 on the backof a disruption in the Essar Steel slurry pipeline (capacity 8 MT, 276 km).Thereafter, sales volumes have gradually rebounded to reach theirprevious levels of ~26.3 MT in FY13.
Exhibit 9:Iron ore sales trend
28.2
26.5
24.1
26.3
27.3
26.3
28562583
42884091 4009
2025
22
23
24
25
26
27
28
29
FY08 FY09 FY10 FY11 FY12 FY13
milliontonne
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
|
pertonne
Volume Blended realisation
Source: Company, ICICIdirect.com Research
Exhibit 10:Iron ore sales volume bifurcation (domestic vs. exports)
24
.4
22
.6
20
.7 23
.8 26
.9
24
.7
3.8
3.9
3.4
2.6
1.6
0.4
0
5
10
15
20
25
30
FY08 FY09 FY10 FY11 FY12 FY13
milliontonne
Domestic Sales Exports
Source: Company, ICICIdirect.com Research
Exhibit 11:Iron ore sales volume bifurcation (FY13E)
Exports &
Others, 3.3 MT,
13%
Sponge Iron (CG
Non Captive),
3MT, 11%
RINL, 7MT, 27%Essar Steel,
5MT, 19%
JSW Group,
8MT, 30%
Top three clients form ~75% of Sales Volume
Source: ICICIdirect.com Research
Exhibit 12:Total sales bifurcation (FY12) (| crore)
Sponge Iron,
66 Cr, 0.6%
Diamonds,10 Cr , 0.1%
Iron Ore, 11168
Cr, 99.3%
Source: Company, ICICIdirect.com Research
Other products
NMDC is also engaged in production of sponge iron & diamonds. Spongeiron is produced by Sponge Iron India (SIIL). The company merged withNMDC in July 2010. The company also owns a diamond mine at Panna inMadhya Pradesh. The companys iron ore business is the major
contributor to its topline with a share of 99.3%. The balance is contributedby sponge iron (0.6%) and diamond (0.1%).
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Investment Rationale
High quality asset with large reserve base
NMDC has a large reserve base with high grade deposits and significantmine life. As on January 1, 2010, according to the Joint Ore ReservesCommittee (JORC), the total iron ore reserve and resource (R&R) base
stands at 1360.7 MT (cut off point 55% Fe grade). Out of the total R&R,~72% is classified as proven reserve while ~13% is classified asprobable indicating a higher extent of recovery certainty. At the currentproduction run rate, the company has a mine life of ~43 years (reserves:production = 43). Higher mine life coupled with superior quality depositprovides strong earning visibility.
Exhibit 13:Iron ore reserves & resources (million tonne)Proved
Reserve
Probable
Reserve Total Reserve
Measured
Resources
Indicated
Resources
Inferred
Resources
Total
Resources
Total Reserve &
Resource Ownership
(mt) (mt) (mt) (mt) (mt) (mt) (mt) (mt)
Chhattisgarh
Deposit -5 38.7 182.2 220.9 - - - - 220.9 2015 100%
Deposit- 10 140.1 - 140.1 - 42.0 14.5 56.5 196.6 2015 100%
Deposit - 11 140.4 - 140.4 17.0 - - 17.0 157.4 2017 100%Deposit -14 130.1 - 130.1 - - 19.5 19.5 149.6 2015 100%
Deposit- 14 NMZ 60.6 - 60.6 3.0 - - 3.0 63.6 2015 100%
Deposit -4 - - - 105.00 - - 105.0 105.0
Deposit -13 319.60 - 319.60 - - - - 319.6
Total 829.5 182.2 1,011.7 125.0 42.0 34.0 201.0 1,212.7
Karnataka
Donomalai 17.6 - 17.6 - - - - 17.6 2028 100%
Kumaraswamy 130.4 - 130.4 - - - - 130.4 2022 100%
Total 148.0 - 148.0 - - - - 148.0
Grand Total 977.5 182.2 1,159.7 125.0 42.0 34.0 201.0 1,360.7
Iron Ore
FC & EC
Pending
Term of
Lease
51% (49% owned by
CMDC)
Source: Company, ICICIdirect.com Research,
Of the above iron ore mining blocks, NMDCs ownership in Deposit 4 and 13 is limited to the tune of 51% as the remaining equity ownership is being held by Chhattisgarh MineralDevelopment Corporation (CMDC). As per the companys latest annual report, NMDC-CMDC owned Deposit-13 has been refused forest clearance by the Ministry of Environment
& Forest (MoEF) and the company has engaged IIRBT, Kolkata for undertaking a bio-diversity study for approaching MoEF for restoration. For the Deposit-4, the company is
currently preparing the mining plan and will further pursue the line of action to obtain requisite permissions and clearances.
Furthermore, the Fe content of NMDCs iron ore (Fe- 64%) is superior tomost of the global peers (~41%-63%). Usually, higher Fe content fetchesbetter realisations (an additional 1% Fe content realises ~US$2-4/tonnehigher realisation) and also acts as a cushion to NMDCs profitability in thecase of downtrend of commodity prices. Hence, despite being present ina volatile industry like iron ore mining, NMDC has a steady earningsprofile on the back of high quality asset and favourable productcomposition (lumps and fines are sold in the proportion of 36% and 64%,respectively).
Exhibit 14:International peers
S.No Company
Base
Country
Reserves
(Million
Tonne)
Grade
(in %)
Production
(Million
Tonne)
Sales
(Million
Tonne)
R/P
Ratio
1 FMG Australia 15163 57 60 57.5 253
2 Kumba Iron Ore L Africa 1938 60 43 45 45
3 BHP Billton Ltd Australia 3400 41-63 160 179 21
4 Vale Brazil 15136 57.4 320 258 475 Rio Tinto Plc London 3669 NA 199 247 18
NMDC India 1160 64 27 26 43
Source: Company PPTs, ICICIdirect.com Research
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Volume led growth to drive earnings
After hitting a peak production level of ~30 MT in FY08, NMDCs outputhad been stagnant with iron ore production dropping to 24 MT in FY10due to the damage done to Essar Steels slurry pipeline in May 2009(capacity 8 MT, 276 km). Thereafter Essar Steel has been sourcing ironore from NMDC through rail and road, thereby helping the company to
restore its production to 25.2 MT in FY11 & 27.3 MT in FY12. NMDC iscurrently executing an impressive capacity addition programme underwhich it plans to increase the current iron ore capacity from 32 MTPA to48 MTPA by FY15E. Our interaction with the management suggests theexpansion is progressing according to schedule and the company is wellplaced to clock greater production volume, going forward
Exhibit 15:Expansion plan
Mining Complex
Pre Expansion
Capacity (mt)
Post
Expansion
Capacity (mt) Capital Outlay
Expected Date
of Completion Progress
Bacheli 15 17 as per schedule
Kirandul 12.7 19.7 | 607 Cr Dec-13
1) Project being executed in 7 packages with orders being placed for all packages 2) Primar
Crusher & Downwill Coveyor works in advanced stage of completion
Chhattisgarh Total 27.7 36.7
Donimalai 4 4
Though the complex has limited reserves, the company is confident of increasing the mine life as t
drilling is performed further
Kumaraswamy 0 7 | 899 Cr Nov-13
1) Project being executed in 6 packages with orders being placed for 4 packages 2) Civil
works for primary crusher completed 3) Designing of downwill coveyor in advanced stage. The
company has partially started production from the Kumaraswamy block on the back of orders by
Supreme Court of India
Karnataka Total 4 11
Total Capacity 31.7 47.7
Source: Company, ICICIdirect.com Research
On the back of additional mines coming on stream, we expect productionvolume growth at 5.8% a CAGR in FY13-15E. Due to logistical issues anda sluggish ramp up of mines, we have been conservative and modelledproduction volume of 28.5 MT in FY14E and 30.4 MT in FY15E.Furthermore, we expect the output from the Donimalai complex todecline, going forward, on the back of limited reserves.Exhibit 16:Production break-up
FY12 FY13 FY14E FY15E
Bacheli 12.6 11.6 11.3 11.3 -1.2%
Kirandul 9.0 7.4 9.0 10.7 20.4%
Chhattisgarh Total 21.7 19.0 20.3 22.1 7.7%
Donimalai 5.6 8.2 3.7 2.0 -50.5%
Kumaraswamy 0.0 0.0 4.5 6.4 NAKarnataka Total 5.6 8.2 8.2 8.4 1.4%
Total Production 27.3 27.2 28.5 30.4 5.8%
Mining Complex
Production
FY13E-15E CAGR
Source: ICICIdirect.com Research,, For FY13 Donimalai volumes included some portion of Kumaraswamy volumes
NMDC has also undertaken various projects to augment its evacuationcapacity thereby supplementing its growing production capacity. Themeasures include the following: (i) commissioning of uniflow railway linein May 2012. (ii) Entering into an MoU with Rashtriya Ispat Nigam (RINL)for construction of slurry pipeline that is further expected to augment theevacuation capacity by 10 MT (ii) in motion weigh bridge in Bailadila
complex that will reduce turnaround time and increase evacuation. (iv)MoU with Indian Railways for doubling railway line between Jagdalpurand Kirandul of around 150 km. We expect these projects to meaningfullycontribute to the sales volume from FY15E onwards.
Expansion plan summary
7MT 48MT
7MT
2MT
32 MT Bacheli
Expanded
Capacity
Existing
Capacity
Kirandul
Kumarasw
amy
Source: Company, ICICIdirect.com Research
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NMDC well placed to cater to relatively firm domestic demandOver a medium to long term horizon most leading steel companies in the
country are in the process of expanding their steel making capacity. As
iron ore is a key raw material required in manufacturing steel, expansion
by steel majors is likely to result in additional demand for iron ore. While
Tata Steel, SAIL and JSPL (partial) have access to their own captive iron
ore mines, expansion by other steel players (without access to captive
mines) like JSW Steel, RINL, etc. augur well for NMDC.Exhibit 17:Domestic capacity addition till FY17 (million tonne)
Company FY13E FY14E FY15E FY16E FY17E
SAIL 2.0 2.0 2.0 1.8 -
Tata Steel, Jamshedpur 2.9 - - - -
Tata Steel, Odisha - - 3.0 - 3.0
NMDC - - - 3.0 -
JSPL Chhattisgarh* - - 1.0 - -
JSPL Odisha 1.5 - 0.5 1.0 1.0
Total Captive 6.4 2.0 6.5 5.8 4.0
RINL 3.0 - 1.0 - -
JSW Steel - - - - 2.0
Electrosteel - 2.2 - - -
Bhushan Steel - 1.5 - 1.2 -
Jindal Stainless - 0.8 - - -
Others 2.0 2.0 2.0 2.0 2.0
Total Non Captive 5.0 6.5 3.0 3.2 4.0
Total Firm Projects 11.4 8.5 9.5 9.0 8.0
JSPL Chhattisgarh* - 1.5 0.5 1.0 0.5
JSW Salem - - - - 1.0
JSW Ispat - - - - 1.2
POSCO Ind - - - - 4.0
Bhushan Power & Steel - - 0.7 -
Uttam Galva, Maharashtra - - - - 1.0
Others 1.5 1.5 1.5 1.5 1.5
Total tentative projects 1.5 3.0 2.7 2.5 9.2
Capacity in FY12 86.8
Capacity in FY17 142.3
78 in FY11, 3.2 JSW Steel, 5.6 Essar
Steel
Giving 50% discount to tentaive projects
Captive
Non-Captive
Non-Captive
Source: Planning Commission, ICICIdirect.com Research
(JSPL Chhattisgarh has partial iron ore integration)
Exhibit 18:corresponding iron ore demand from non-captive playersParticulars FY13E FY14E FY15E FY16E FY17E
Incremental demand from
non captive players (firm
projects) 8.0 10.4 4.8 5.1 6.4
Incremental demand from
non captive players
(tentative projects) 1.2 1.2 1.8 1.2 7.0
Total 9.20 11.60 6.56 6.32 13.36
NMDC's incremental capacity of
16 MT is coming at an opportune
time to capture this increasing
iron ore demand oppurtunity
Source: ICICIdirect.com Research
Future iron ore demand skewed more towards fines vis--vis lumps...Exhibit 19:Pellet plants in IndiaPlayer Location Capacity (MT)
JSW Steel Bellary, Karnatakaka 9.2
Essar Steel Visakhapatnam, AP 8
Tata Steel Jharkhand 6
Essar Steel Odisha 6
JSPL Odisha 4.5
KIOCL Mangalore, Karnataka 3.5
Others 11.5
Total 48.7
Pellet Plants Planned
JSPL Odisha 5.5
Essar Steel Odisha 6
SAIL Jharkhand 4
NMDC Chattisgarh 2
NMDC Karnataka 1.2
OMDCL Odisha 2
Total 20.7 Source: Ministry of Mines (IBM), ICICIdirect.com Research
Exhibit 20:Sintering plants in IndiaPlayer Location Capacity (MT)
Tata Steel Jharkhand 7.6
Bokaro Steel Plant, SAIL Jharkhand 6.2
Bhilai Steel Plant, SAIL Chhattisgarh 6.3
VST, RINL Andhra Pradesh 5.3
Durgapur Steel Plant, SAIL West Bengal 3
Rourkela Steel Plant, SAIL Orissa 3
JSPL Chattisgarh 2.3
JSW Steel Karnataka 12.3
JSW Ispat Maharashtra 2.2
NINL Odisha 1.7
Bhushan Steel Odisha 1
others 1
Total 51.9
Sintering Plants Planned
JSW Ispat Maharashtra 4 Source: Ministry of Mines (IBM), ICICIdirect.com Research
Majority domestic steel manufacturers with the vision of optimising theircost structures have set up pelletisation & sintering facilities that will resultin iron ore demand being skewed more in favour of fines, going forward.
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Low cost of operations
NMDC's two principal mining complexes, Kirandul and Bacheli, produced~70% of the company's production of iron ore in FY13. Concentration ofmajority of the output at two mining complexes results in economies ofscale for NMDC. Furthermore, majority of the mines are highlymechanised, which results in lower wastage. The company also has
access to a large and inexpensive labour force, which helps to keep costsin check. On the back of stable realisations coupled with low cost ofoperations, NMDC realises high EBITDA margin to the tune of ~65-70%.The cost of production (CoP, including royalty) at US$18-22/tonne is oneof the lowest in the world while the CoP of global peers (such as Vale,Rio-Tinto, BHP Billiton and FMG) is in the range of US$22-64/tonne.
Exhibit 21:Peer comparison (last reported fiscal yearFY13/CY12)
S.No Company
Relaization (US$
per tonne)
EBITDA\tonne
(US$ per tonne)
COP\tonne (US$
per tonne)
1 FMG 116.5 52.8 63.7
2 Kumba Iron Ore 124.1 63.2 60.93 BHP Billton Ltd 126.3 83.9 42.3
4 Vale 96.8 74.9 21.9
5 Rio Tinto Plc 98.3 64.1 34.2
NMDC 73.8 52.7 21.1
Source: Company, ICICIdirect.com Research
NMDC EBITDA has been normalized to account for one time expense hit in FY13
Exhibit 22:Cost of production trend
375489
653759
1036
856
1266 1207
1458
261 305330
565708
803955
806
1124
0
200
400
600800
1000
1200
1400
1600
FY07
FY08
FY09
FY10
FY11
FY12
FY13P
FY14E
FY15E
|
pertonne
COP COP excl Export Duty
Source: Company, ICICIdirect.com Research
Going forward, the majority of the new mines, which are expected to be
operational in future, are in close proximity to the existing mines, whichwould aid the company by use of existing infrastructure for additionaloutput, thus resulting in optimisation of costs. Mechanisation of existingmines will also keep a check on costing.
Exhibit 23:Realisation, EBITDA/tonne & expenses/tonne
4
289
4091
4019
353
8
353
8
3253
3234
2753
2332
2080
12661207
1458
8561036
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
FY11 FY12 FY13P FY14E FY15E
|
pertonne
0
200
400600
800
1000
1200
1400
1600
|
pertonne
Realisation EBITDA per tonne Expenses per tonne (RHS)
Source: Company, ICICIdirect.com Research
Exhibit 24:Expenses breakup (per tonne basis)
46 86 40 66 66187 194 221 223 235
354 375 362 287 293
32853
311 401 334
121
149
332 229530
0
200
400
600
800
1000
1200
1400
FY11 FY12 FY13P FY14E FY15E
|
pertonne
Raw Materials Expense Employee Expense
Royalty & Cess Selling & Services
Other Expenses
Source: Company, ICICIdirect.com Research
As we have taken the full impact of the MMDR Bill in our FY15Eassumptions, other expenses are likely to increase from | 332/tonne inFY13 to | 530/tonne in FY15E. As a result, total expenses per tonne arelikely to increase from ~| 1266/tonne in FY13 to ~| 1458/tonne in FY15E.
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Pellet plant: Step in the right directionThe company is also setting up a pellet plant with a capacity of 1.2 MT in
Donimalai, Karnataka. We believe pellet sales will drive incremental
EBITDA for the company on the back of optimal and captive raw material
feed. The company proposes to use only 40% of its fines produce as the
raw material feed for its pellet plant and intends to use the idle slimes
lying at its mining complex in Karnataka as the remainder of raw materialfeed. In our FY15E target price calculation, pellet sales earn revenue of
| 585 crore with cost of | 238 crore, thereby resulting in EBITDA of | 347
crore and contributes ~| 4 per share in our target price of | 138.
Dividend payout increases, expected to remain high, going forward
The company has in the past maintained a healthy dividend payout ratio
at ~20-25% of its PAT levels and gradually increased the same to 44% in
FY13. We believe the payout ratio will remain robust at 40% and ~39%,
respectively, in FY14E and FY15E, going forward, as the company
possesses sufficient liquidity to fund its expansion programme and would
return the surplus cash to shareholders via dividends. The increase in
dividend payout will also help company improve its dismal return ratios
(RoCE and RoE). It will also lead to notable cash inflow to its promoter
group i.e. Govt of India in the form of dividends.
Exhibit 25:Dividend per share & dividend payout ratio trend
3.3
4.5
7.0
5.6
5.2
16.4
18.3
16.0
14.0
13.3
2025
4440 39
0
5
10
15
20
FY11 FY12 FY13 FY14E FY15E
|
pershare
0
10
20
30
40
50
%
DPS EPS Dividend Payout Ratio
Source: Company, ICICIdirect.com Research
Exhibit 26:RoCE, RoE & RoIC trend
44
36
26
22
34
30
23
18
16
19
651
332
231
168118
0
5
10
1520
25
30
35
40
45
50
FY11 FY12 FY13 FY14E FY15E
%
0
100
200
300
400
500
600
700
%
ROCE (LHS) ROE (LHS) ROIC (RHS)
Source: Company, ICICIdirect.com Research
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Pricing methodology: A conundrum
NMDCs pricing policy has witnessed a significant change over the last
three to four years. Earlier, the company used to follow export parity
pricing (net back system). However, after the rise in export duty and
increase in railway freight charges, the netback mechanism became
unviable and the company shifted its pricing policy to market based
pricing. The market based mechanism is not very clear and is broadlybased on the domestic demand-supply dynamics. NMDCs pricing policy
is still in an evolving stage. The company has also appointed KPMG to
advise it on the domestic iron ore pricing methodology.
Pricing concerns overdone, sufficient cushion exists
NMDCs stock price has been under pressure in the recent past on the
back of concerns over the unexpected drop in iron ore lump prices and
recent weakness in global commodity prices. We, however, believe the
decrease in lump prices was in the offing as the cost dynamics of the
sponge iron industry resulted in closure of several sponge iron units in
Chhattisgarh resulting in consequent pressure on iron ore lumps demand
and prices. Moreover, the current cost dynamics were tilted towardsusage of pellets instead of lumps for domestic steel manufacturers. We,
however, believe the present concerns are overdone as there exists
limited leg room for a further reduction in iron ore lump prices. Moreover,
NMDCs iron ore prices are also at a steep discount to the international
pricing benchmark, thereby providing it s a good margin of safety against
any further correction in international iron ore prices.
Exhibit 28:International iron ore price movement
101
111
60
80
100
120
140
160
180
200
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Jan-1
3
May-1
3
US$perto
nne
China Import iron ore fines 58% Fe spot $/t China Import iron ore fines 62% Fe spot $/t
Source: Company, ICICIdirect.com Research
On the back of shortage of iron ore due to the ongoing mining restrictions
in Karnataka and Odisha there exists firm demand for iron oredomestically. Moreover, we expect fines prices to remain firm on the back
of a healthy demand scenario amid rapid addition of sintering and
pelletisation facilities in the country.
Exhibit 27:NMDC pricing timeline
s
Time Frame Particulars
Till FY10
NMDC's iron ore sales were based on annual contract basis wherein iron ore
pricing was at a considerable discount to export parity pricing. Lumps were sold at
~40-75% premium to fines
Apr'10-Jan'12
NMDC shifted from annual contracts to quarterly contracts wherein pricing
strategy remained the same as earlier
Jan'12-Oct'12
The government raised export duty on iron ore lumps and fines to 30% as
compared to 20% earlier. Hence, NMDC shifted to market based pricing
mechanism, which it has been following over the last few quarters
Oct'12 NMDC shifted from quarterly pricing to monthly pricing
Source: ICICIdirect.com Research
Discount to international prices
NMDC
price
Landed
imported iron
ore costs
Price
differential Discountarticulars (| /tonne) (| /tonne) (| /tonne) (%)Iron ore
fines 2510 7236 4726 65%
Iron ore
lumps 4400 7960 3560 45%
urce: ICICIdirect.com Research, Assumed International Iron ore
ces at US$ 120/ tonne
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Forward integration; is it unrelated diversification?
NMDC is setting up a steel plant of capacity 3 MT at a capital outlay of |
15,525 crore. The company has received all statutory clearances and
acquired requisite land for the project site. NMDC has already placed
orders for ~| 11,000 crore and incurred capex worth | 1092 crore in
FY13. The company also plans to incur a capex of | 1880 crore in FY14E.
There exists uncertainty over the likely commissioning of the steel plantwhile the very nature of steel business is that of a low RoCE business.
Hence, we value NMDCs investment in the steel plant at P/BV of 0.5x,
thereby giving a 50% discount to its equity investment in the steel plant.
In return for setting up a steel plant in Chhattisgarh, the company has
obtained fresh access to additional reserves & resources (R&R) of iron ore
amounting to ~425 MT Also, out of the above mentioned R&R of 425 MT
the company has a dedicated mining complex (Deposit 4, Chhattisgarh,
R&R amounting to ~105 MT) for the steel plant while the remaining 320
MT (Deposit 13, Chhattisgarh) is for the purpose of commercial mining.
Benefits from this will accrue to NMDC, going forward, in the long run.
MMDR Bill
In July 2011, the Group of Ministers (GoM) approved the draft Mines and
Mineral (Development & Regulation) (MMDR) Bill. The MMDR Bill 2011,
seeks to replace more than the half-a-century-old law under the same
name and was tabled in Parliament in December 2011. Later, it was sent
to the Standing Committee. For non-coal and non-lignite miners, the new
law has proposed payment of an amount equivalent to royalty paid by the
companies to the state government. The collected money was proposed
to be used for the welfare of the project-affected persons through a newly
created District Mineral Foundation.
In our FY15E assumption we have taken into account the impact of
MMDR Bill and, hence, an amount equivalent to royalty has been charged
in the FY15 P&L under the head other expenses. Without taking into
account the impact of the MMDR Bill in FY15 numbers the EBITDA would
have been | 7563 crore and subsequent PAT would have been | 5869crore. Hence, the consequent target price would have been | 151.
Exhibit 29:Implied value from steel businessParticulars Value
FY15E CWIP (Steel Plant) 8000
P/B Multiple 1
Percentage Discount to P/B Multiple 0.5
Implied Equity Value (| per share) 10.1
Source: ICICIdirect.com Research
The companys decision to venture into the steel business will
further dampen its return ratios (RoCE & ROE) due to the very
nature of the steel industry being a low ROCE business.
However, any ramp up of iron ore production from the mines
allotted to the company against its investment in steel
business in Chhattisgarh will help improve the same
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Venturing into coal: still time to unfold
The company has been allocated two coal blocks in Madhya Pradesh
[Shahpur East (reserves of 63.6 MT) and West (reserves of 52.7 MT)]
under the government dispensation route for commercial mining. NMDC
is working on getting the requisite approvals and expects to start
production by the end of 2014.
The company has also applied for 12 coal blocks (three for commercial
and nine for power) out of 17 coal blocks notified by MoC for allotment of
coal blocks to government companies under Coal Mines Rule, 2012. Ourinteraction with the companys management suggest NMDC will be
targeting coal excavation in a big way, going forward, as it has surplus
resources and requisite expertise to do so. We believe the company will
be able to obtain requisite approvals within the ambit of coal mining but
the coal activity will be limited at least till FY15E on the back of shortage
of railway rakes domestically for transportation of coal. We have not
assumed any production from NMDCs coalfields in our target price
calculation.
Other joint ventures:
The company has formed various joint ventures with other players in the
industry with the aim of increasing its footprint both in terms of quantityof offering and asset offering. The projects, if executed in a timely
manner, will provide a further trigger in NMDCs earnings with NMDC
becoming a major resource player from the current iron ore major.
The company has invested ~| 248 crore in all its joint ventures as ofMarch 31, 2012. We have not assumed any contribution from these
projects in deriving NMDCs financials for FY14E and FY15E as we believe
it will take some time for these projects to kick start.
Exhibit 30:Coal blocksS.No. Particulars Shahpur East, M.P. Shahpur West, M.P
1 Mining plan Approved Approved
2 Mining lease Approval received Appproval awaited
3
Environmental &
forest clearnace
Application submitted to concerned district
collectorsLand acquisition4
Appproval awaited
Source: Company, ICICIdirect.com Research
Exhibit 31:Other joint ventures & subsidiariesS.No. Name of the Company Partner
NMDC's
Stake Particulars
1 Legacy Iron Ore Ltd. 50%
Development of hematite iron ore reserves and
gold deposits
2 J&KMDC Ltd. JKML 74% Setting up of magnesite project in Jammu
3 NMDC-CMDC Ltd. CMDC 51%
Development of iron ore deposit Nos.13 & 4 at
Bailadila
4 NMDC Power Ltd. - 100%
Setting up of power plant in respect of 3.0
MTPA steel plant at Nagarnar
5 JNMDC Ltd. JSMDC 60%
Development of iron ore deposit at Sasangoda,
Jharkhand
6
International Coal Ventures
Pvt. Ltd.
SAIL,Coal India,
RINL 14.30%
Acquisition of coking and thermal coal assets
abroad
7 Neelachal Ispat Nigam Ltd. MMTC & Others 12.87%
Pig iron plant at Odisha and also engaged in
production of BF coke, sinter, etc.
8
Kopano-NMDC Mineral Pty.
Ltd., Johannesburg
Kopano Logistic
Services(Pty.) Ltd 50%
To acquire and develop mineral prospects for
steel making raw material such as iron ore, coal
and manganese ore
Source:Company,ICICIdirect.com Research
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Financials
Modest revenue growth in FY13E-15E aided by higher sales volumeWe expect NMDC to clock a modest revenue growth of 3.4% CAGR inFY13-15E primarily on the back of an increase in iron ore sales volume at6.8% CAGR amid a drop in iron ore blended realisations at 6% CAGR in
FY13-FY15E. We have modelled an iron ore sales volume of 28.4 MT inFY14E and 30.0 MT in FY15E. We expect the blended realisation of ironore to decline, going forward, on the back of a partial decline in salesproportion of lumps in the total iron ore sales volume mix (due todomestic demand being skewed more in favour of fines as compared tolumps) and fall in iron ore lump prices (on the back of low demand andconverging premiums), going forward.
Exhibit 32:Revenue growth trend
11,3
61
11,2
43
10,5
59
10,1
34
11,2
82
9,000
9,500
10,000
10,500
11,000
11,500
12,000
FY11 FY12 FY13P FY14E FY15E
|
crore
Source: Company, ICICIdirect.com Research
Exhibit 33:Iron ore sales volume & blended realisation trend
26.3 27.3 26.3 28.4 30.0
4288
4091
4009
35383538
20
22
24
26
28
30
32
FY11 FY12 FY13 FY14E FY15E
milliontonne
3000
3300
3600
3900
4200
4500
|/tonne
Volume Blended realisation
Source: Company, ICICIdirect.com Research
Exhibit 34:AssumptionsParticulars Units FY11 FY12 FY13 FY14E FY15E FY13-15E CAGR
Iron ore production MT 25.2 27.3 27.2 28.5 30.4 5.8%
Iron ore domestic sales MT 23.8 26.9 24.7 26.2 28.0 6.5%
Iron ore export sales MT 2.6 0.4 1.6 2.2 2.0 11.8%
Iron ore total sales MT 26.3 27.3 26.3 28.4 30.0 6.8%
Pellet sales MT - - - - 0.9
Lumps proportion % 39% 37% 36% 33% 33%
Fines proportion % 61% 63% 64% 67% 67%
Blended realisation |/tonne 4288 4091 4009 3538 3538 -6.0%
Lumps realisation |/tonne Current Realization July'13 -->4400 4202 4000 -6.1%
Fines realisation |/tonne Current Realization July'13 -->2510 2430 2621 0.4%
Internation Iron Ore US$/tonne 158 158 132 125 120
Source: Company, ICICIdirect.com Research
We expect iron ore lumps prices to remain soft on the back of subdueddemand, with sponge iron companies operating at low capacity utilisationin Chhattisgarh and increasing competition from iron ore pelletsdomestically.We expect iron ore lumps prices to decline from the present(July, 2013) levels of | 4400/tonne (Fe grade ~65%) at a rate of 4.5% to| 4202/tonne (blended) in FY14E and further 4.8% to | 4000/tonne
(blended) in FY15E. We are also expecting iron ore fines prices to declinefrom the present (July, 2013) levels of | 2510 per tonne (Fe grade~64%)by 3.2% to | 2430 per tonne (blended) in FY14E and expect them torecover by 7.9% to | 2621 per tonne (blended).
FY13-15E
CAGR: 3.4%
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Absolute EBITDA to decline, margins to remain mutedWe expect EBITDA margins and corresponding EBITDA/tonne to remainsubdued, going forward, on the back of a decline in iron ore lump pricesand also on account of the MMDR Bill impact, which we have modelled inour FY15 estimates. Hence, on an absolute basis, the EBITDA is expectedto de-grow at a CAGR of 4.8% in FY13-15E primarily on the back of a
reduction in iron ore realisations (CAGR decline of 6% in FY13-15E) andmodelling the impact of MMDR Bill in our FY15 estimates.
Exhibit 35:EBITDA margins trend
8,6
43
8,9
25
7,3
78
6,7
21
6,6
85
66.268.9
76.0
79.2
59.2
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
FY11 FY12 FY13P FY14E FY15E
|
crore
40
50
60
70
80
90
%
EBITDA (| crore) EBITDA Margin (%)
Source: Company, ICICIdirect.com Research
Exhibit 36:corresponding EBITDA/tonne (Iron ore segment)
4,2884,091 4,009
3,538 3,5383,253 3,234
2,7532,332
2,080
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY11 FY12 FY13P FY14E FY15E
|p
ertonne
Blended Realization (L.H.S) EBITDA/tonne (R.H.S)
Source: Company, ICICIdirect.com Research
PAT to de-grow, albeit marginally!!
We expect PAT to de-grow at a CAGR of 8.9% in FY13-15E on the back ofa reduction in EBITDA margins (due to drop in iron ore lump prices andtaking into account the impact of MMDR Bill) and decline in other incomeamid declining cash & cash equivalents (due to the ongoing capexprogramme). We expect the cash & cash equivalents to decline at a CAGRof 9.4% in FY13-15E on the back of the company executing various capexprogrammes. We expect NMDC to realise a pre-tax yield of 9.0% and8.0% on its liquid assets in FY14E and FY15E, respectively.
Exhibit 37:PAT & PAT margins trend
6,5
00
7,2
65
6,3
56
5,5
68
5,2
73
65%
57%55%
47%
60%
-
1,000
2,000
3,000
4,000
5,0006,000
7,000
8,000
FY11 FY12 FY13P FY14E FY15E
|
crore
45%
50%
55%
60%
65%
70%
75%
PAT (| crore) PAT Margin
Source: Company, ICICIdirect.com Research
Exhibit 38:decliningon the back of decline in other income
17,2
28.0
20,2
64.5
21,0
25.2
20,5
06.0
17,2
72.3
8.0
10.8 10.8
8.0
9.0
-
5,000.0
10,000.0
15,000.0
20,000.0
25,000.0
FY11 FY12 FY13P FY14E FY15E
|c
rore
-
2.0
4.0
6.0
8.0
10.0
12.0
%
Cash & Cash Equivalents Other Income Yie ld
Source: Company, ICICIdirect.com Research
As per the Supreme Court directive, an amount equivalent to
10% of sale proceeds from Karnataka is to be contributed to
special purpose vehicle (SPV). During Q4FY13, NMDCcontributed an amount to the tune of | 337 crore to the SPV,
which is for around 18 months. We have assumed iron ore
sales volume of 8.2 MT for FY14E & 8.4 MT for FY15E from
Karnataka. The subsequent contribution to the SPV comes to
~| 250 crore for FY14E and ~| 260 crore for FY15E
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RoCE and RoE ratios to decline, CWIP increases as percentage of net worth
We expect return ratios to decline, going forward, on the back of areduction in profitability with minimal incremental earnings in FY13-15Eand a large equity base. The earnings will also be subdued as the surpluscash gets tied up in capital expenditures and is not generating sufficient
other income. Going forward, we expect return ratios to be underpressure till the time the steel plant is commissioned (which will happenonly in FY16-17).
Exhibit 39:RoCE & RoE trend
44.4
33.8
19.421.5
26.3
36.0
29.8
23.1
18.315.8
10
20
30
40
50
FY11 FY12 FY13P FY14E FY15E
%
RoCE RoE
Source: Company, ICICIdirect.com Research
Exhibit 40: CWIP as percentage of net worth
677 14943350
6070
10570
19214
2440627511
30483
33325
3.5
6.1
12.2
19.9
31.7
0
5000
10000
15000
20000
25000
30000
35000
FY11 FY12 FY13 FY14E FY15E
|
crore
0
5
10
15
20
25
30
35
%
CWIP Networth CWIP as a % of Networth
Source: Company, ICICIdirect.com Research
Peer comparison
NMDC can be compared to its international peers that include the pureplay iron ore miners namely Forstescue Metals Group & Kumba Iron OreLtd and diversified mining companies like Vale, Rio Tinto Plc and BHPBilliton.
Exhibit 41:Peer comparison
S.No Company
Base
Country
Reserves
(Million
Tonne)
Grade
(in %)
Production
(Million
Tonne)
Sales
(Million
Tonne)
R/P
Ratio
Previous FY
Sales (US$
Million)
Previous FY
EBITDA
(US$ Million)
Previous FY
PAT(US$
Million)
Relaization
(US$ per
tonne)
EBITDA\tonne
(US$ per
tonne)
EBITDA
Margin
(%)
1 FMG Australia 15163 57 60 57.5 253 6700 3035 1600 116.5 52.78 45
2 Kumba Iron Ore L Afr ica 1938 60 43 45 45 5549 2827 1489 124.1 63.24 51
3 BHP Billton Ltd Australia 3400 41-63 160 179 21 22601 15027 NA 126.3 83.95 66
4 Vale Brazil 15136 57.4 320 258 47 24972 19333 NA 96.8 74.93 77
5 Rio Tinto Plc London 3669 NA 199 247 18 24279 15827 9242 98.3 64.08 65
NMDC India 1160 64 27 26 43 1940.9 1385 1166 73.8 52.7 71
Source: Bloomberg, Company PPTs, ICICIdirect.com Research
As compared to global peers, NMDC has the one of the best grade ironore reserves (64% Fe content) in the world. High quality iron ore reservesaid in maintaining superior EBITDA margins. NMDC also has a healthymine life, which is broadly in line with major global players like Vale andKumba Iron Ore, thereby implying sustainable mining operations for along time.
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Valuation
NMDC is currently trading at 3.3x FY15E EV/EBITDA as against its
historical two year forward EV/EBITDA multiple of 7.9x (three year
average) and its peer group CY14E EV/EBITDA multiple of 5x. We have
modelled iron ore sales volume of 28.4 MT in FY14E and 30 MT in FY15E.
We have incorporated MMDR Bill impact in our FY15E assumptions. We
have valued NMDC at its global peers average FY15E/CY14E EV/EBITDAof 5x and given a 50% discount to CWIP in the steel plant, thus arriving at
a target price of | 138. Possession of superior quality iron ore reserves,
the companys position in the lower quartile of the iron ore cost curve and
dominance in the domestic market reiterates our positive stance.
Exhibit 43:NMDC vis--vis global peers2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015
1 FMG Australia 253 9363 20094 8.6 6.1 4.0 3.7 8.6 6.0 3.9 3.5 2.3 1.8 1.2 0.9 50.3 32.8 36.2 29.8
2 Kumba Iron Ore Ltd South Africa 45 14002 15027 6.1 5.3 5.6 6.5 11.5 9.5 9.9 11.5 9.4 8.1 7.3 6.7 79.3 88.4 72.0 60.3
Pure Players Comparable Avergae 7.3 5.7 4.8 5.1 10.0 7.7 6.9 7.5 5.8 4.9 4.2 3.8 64.8 60.6 54.1 45.0
1 BHP Billton Ltd Australia 21.3 145146 176788 6.5 6.2 5.6 5.1 1 1.8 11.5 1 0.2 9.2 2.3 2.1 1.9 1.7 2 5.1 1 8.0 1 9.2 1 8.5
2 Vale Brazil 47.3 64982 90367 5.1 4.5 4.4 4.3 6.4 6.1 6.1 6.2 0.8 0.9 0.8 0.8 6.6 14.1 12.8 12.7
3 Rio Tinto Plc London, UK 18.4 77695 108255 6.8 5.4 4.7 4.5 8.0 7.6 6.6 6.1 1.6 1.3 1.2 1.0 -6.0 18.9 19.8 18.4
Large Players Avergae 6.1 5.4 5.1 4.6 8.7 8.4 7.6 7.1 1.5 1.4 1.3 1.1 8.6 17.0 17.3 16.5
Total Average 6.6 5.5 5.0 4.8 9.2 8.1 7.3 7.3 3.3 2.8 2.5 2.2 31.1 34.4 32.0 27.9
NMDC India 42.6 6692 4772 2.2 2.5 2.8 3.3 5.5 6.2 7.1 7.5 1.6 1.4 1.3 1.2 29.8 23.1 18.3 15.8
2012 nos are last 4Q TT, Market Cap & EV are in US$ million
S.No Company Base Country
R/P
Ratio
Market
Cap EV
EV/EBITDA P/Adj EPS (X) P/B (X) ROE (%)
Source: Bloomberg, ICICIdirect.com Research
Exhibit 44:EV/EBITDA Multiple SensitivityEV/EBITDA Multiple (x) 4 4.5 5 5.5 6 6.5 7
Target Price (| per share) 121 130 138 146 155 163 172
Potential Upside (%) 21.1 29.5 38.0 46.4 54.8 63.2 71.7 Source: Company, ICICIdirect.com Research
Given our iron ore sales volume (30 MT) and blended realisation
(| 3538/tonne) assumptions, for every 0.5x increase in EV/EBITDA
multiple our target price increases by | 8.4. We have valued the stock at
5x FY15E EV/EBITDA and given a 50% discount to CWIP in the steel plant,thus arriving at a target price of | 138.
Exhibit 42:EV/EBITDA valuationParticulars Value
FY15E EBITDA (| Crore) 6685
Peer Avergae Multiple 5.0
Enterprise Value (| Crore) 33423
FY15E Cash & Cash Equivalent (| Crore) 17272
Implied Equity (| Crore) 50695
No.of Shares 396.5
Implied Target Price (|) 128
FY15E CWIP (Steel Plant) 8000
P/B Multiple 1
Percentage Discount to P/B Multiple 50%
Implied Equity Value 10.1
Target Price (|) 138
CMP (|) 100
Potential Upside 38%
Source: ICICIdirect.com Research
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Price sensitivity
Exhibit 45:Sales volume & realisation sensitivity (FY15E)24 26 28 30 32 34
3000 96 103 111 118 126 133
3250 103 111 119 127 135 143
3500 111 119 128 137 145 1543750 118 127 137 146 155 164
4000 126 135 145 155 165 175
4250 133 143 154 164 175 185
Sales Volume (million tonne)
Blended
Rea
lization
(|/tonne)
Source: Company, ICICIdirect.com Research
Given our iron ore sales volume (30 MT) and blended realisation (| 3538
per tonne) assumptions in FY15E, for the same level of realisation our
target price increases by ~| 7.4 for every 2 MT increase in iron ore sales
volume and vice-versa. Also, given the same volume, our target price
increase by ~| 10.4 for every | 250/tonne increase in blended realisation.
Average trading multiples
Exhibit 46:One year forward EV/EBITDA
0
50000
100000
150000
200000
250000
Apr-06
Se
p-06
Fe
b-07
Jul-07
De
c-07
Ma
y-08
Oct-08
Mar-09
Au
g-09
Ja
n-10
Ju
n-10
No
v-10
Apr-11
Se
p-11
Fe
b-12
Jul-12
De
c-12
Ma
y-13
|
crore
EV 6x 8x 9x 10x
Source: Company, ICICIdirect.com Research
Exhibit 47:One year forward average EV/EBITDA multiple
2.8
12.2
0
5
10
15
20
25
30
35
40
45
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
X
EV/EBITDA Average
Source: Company, ICICIdirect.com Research
Exhibit 48:Two year forward EV/EBITDA
0
50000
100000
150000200000
250000
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
|
crore
EV 6x 8x 9x 10x
Source: Company, ICICIdirect.com Research
Exhibit 49:Two year forward average EV/EBITDA multiple
3.3
11.3
0
10
20
3040
50
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
X
EV/EBITDA Average
Source: Company, ICICIdirect.com Research
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ICICI Securities Ltd|Retail Equity Research Page 19
Risks & Concerns
More-than-expected decline in iron ore lump prices
We expect iron ore lumps prices to reduce from the present (July, 2013)
levels of | 4400/tonne at a rate of 4.5% to | 4202/tonne in FY14E andfurther 4.8% to | 4000/tonne in FY15E. We are also expecting iron ore
fines to decline from the present (June, 2013) levels of | 2510/tonne by3.2% to | 2430/tonne in FY14E. Any further drop in iron ore prices wouldput additional pressure on EBITDA margins and, consequently, compel us
to lower our target price.Exhibit 50:Iron ore price sensitivity
3000 3250 3500 3750 4000 4250
3000 116 125 134 143 153 162
3250 117 126 135 144 154 163
3500 118 127 136 146 155 164
3750 119 128 138 147 156 165
4000 120 129 139 148 157 166
4250 121 131 140 149 158 167
FY14E
FY15E
Source: ICICIdirect.com Research
Adverse weather i.e. heavy rains
The main business of the company is mining of iron ore, which is
subdued when rainfall occurs. Hence, mining activity gets affected during
monsoons. Though the company has sufficient inventory at hand to
compensate for regular rainfall any negative deviation from the same
could result in lower profitability. Any increase in normal rainfall could
lead to a fall in the consequent production and sales volume, thereby
putting pressure on our operating profit that we derive. Consequently, it
would compel us to lower our target price
Non supply/irregular supply of railway rakes by Indian Railways
The company currently possesses the rake offloading capacity equivalent
to 20 rakes per day, which takes into consideration the offloading capacity
at both mining complexes in Chhattisgarh and Karnataka. Any disruption
in the supply of rakes could result in a decline in iron ore offtake and a
consequent decline in the topline as well as bottomline, resulting in a
downward revision of our target price.
Delay in pellet plant commissioning
Our interaction with the management suggests the pellet plant
construction is in full swing and is expected to get commissioned by
November 2013. We expect the benefits of commercial production of the
pellet plant to flow in FY15E and are assuming it will run at a capacity
utilisation of 75% in FY15E. We expect the pellet plant to contribute
~| 347 crore towards the consolidated EBITDA in FY15E. Any delay in
commissioning of the same would result in a reduction in our derived
operating profit and consequent target price.
Decline in international iron ore prices
Though NMDC sells iron ore, which is at a good discount (~60-65%) to its
international benchmark, further easing of global iron ore prices may lead
to softening of domestic prices as well. The discount does provide a
cushion against price correction to NMDC but the company may have torevert to price cuts to help the domestic industry maintain its competitive
advantage. Any price correction would pressurise our derived operating
profit and, consequently, lower our target price.
For every | 250/ tonne decrease in realisation in FY14E(keeping FY15E realisation constant) our target price
declines by | 1.1 while for every | 250/tonne reduction inrealisation (keeping FY14E realisation constant) will reduce
our target price by | 9.2
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Naxalites/Maoists attack
The mining operations are located in geographically remote areas, some
of which are at risk of attacks by rebel groups such as Naxals and
Maoists. Such attacks have had and may continue to have a materially
adverse effect on NMDCs operation. In addition to disruptions in state-
owned railway lines, the company's supplies through rail (KK Line) fromthe Kirandul and Bacheli complexes to the Vizag port have been restricted
from time to time due to security concerns on terrorist activities of
Naxalite rebels operating in the area.
Upward revision in royalty rates of iron ore
Under the National Mineral Policy, the royalty rates of minerals (including
iron ore) generally get revised once in every three years. However, the
current revision in iron ore royalty rates has already got delayed by a year
(as rates were last hiked in 2009) as the study group could not finalise its
report owing to administrative changes in the Mines Ministry. Considering
the current regulatory scenario, there is a strong possibility of an upward
revision in royalty rates of iron ore, which currently stand at 10%.Discontented with the present royalty rates, Odisha and Chhattisgarh
have already demanded a multi-fold increase in the levy. Though the
royalty is pass-through for NMDC, future ability to pass on the increase in
royalty will depend upon the markets scenario at that particular point in
time. Any decision to absorb a part or full royalty increase will have a
decretive effect on EBITDA & consequent target price calculation
Possibility of governments intervention in pricing policy
Currently, the pricing policy of NMDC is broadly market driven (based on
demand supply dynamics). However, a possible intervention by the
Government of India (GoI) in pricing policy of iron ore so as to favoursteel companies like putting cap on pricing, etc. is likely to adversely
impact the margins and profitability of NMDC.
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Financial Scorecard (Consolidated)
Exhibit 51:Profit and Loss(Year-end March) FY11 FY12 FY13P FY14E FY15E
Net Sales 11,361.0 11,243.3 10,558.7 10,134.4 11,282.0
Other Operating Income 8.4 18.6 145.6 15.0 15.0
Total Operating Income 11,369.3 11,261.9 10,704.3 10,149.4 11,297.0
Other Income 1,203.2 2,016.5 2,238.9 1,868.9 1,511.1
Total Revenue 12,572.5 13,278.4 12,943.1 12,018.3 12,808.1
Raw Material Expenses 122.0 233.8 104.6 188.1 435.9
Employee Expenses 491.1 529.1 579.9 634.3 706.1
Royalty & Cess 931.8 1,022.6 952.4 814.4 879.0
Selling Expenses 863.9 144.0 818.0 1,139.3 1,002.6
other expenses 317.2 407.7 871.4 652.0 1,588.9
Total Operating Expenditure 2,725.8 2,337.2 3,326.3 3,428.2 4,612.4
EBITDA 8,643.5 8,924.7 7,378.0 6,721.2 6,684.5
Interest - - - - -
Less: Non Operating Expenses - 51.3 - - -
PBDT 9,846.7 10,889.9 9,616.8 8,590.1 8,195.6Depreciation 120.4 130.2 138.5 153.3 205.6
PBT 9,726.3 10,759.6 9,478.3 8,436.8 7,990.1
Total Tax 3,226.6 3,494.1 3,122.8 2,868.5 2,716.6
PAT 6,500.1 7,265.4 6,355.6 5,568.3 5,273.4
EPS 16.4 18.3 16.0 14.0 13.3
Source: Company, ICICIdirect.com Research
Exhibit 52:Balance Sheet(Year-end March) FY11 FY12 FY13P FY14E FY15E
Equity Capital 396.5 396.5 396.5 396.5 396.5
Reserve and Surplus 18,818.0 24,009.9 27,114.5 30,086.2 32,929.0
Total Shareholders funds 19,214.5 24,406.3 27,511.0 30,482.7 33,325.4
Secured Loan - - - - -
Unsecured Loan - - - - -
Deferred Tax Liability 102.9 100.1 104.5 104.5 104.5
Other Non Current Liabilities - 23.4 30.8 30.8 30.8
Liability side total 19,317.4 24,529.8 27,646.3 30,617.9 33,460.7
- - - - - -
Assets - - - - -
Total Gross Block 2,272.8 2,388.2 2,488.2 2,988.2 4,488.2
Less Total Accumulated Depreciatio 1,173.6 1,199.3 1,337.9 1,491.2 1,696.8
Net Block 1,099.2 1,188.8 1,150.3 1,497.0 2,791.4
Total CWIP 677.2 1,494.2 3,350.5 6,070.5 10,570.5
Total Fixed Assets 1,776.4 2,683.0 4,500.8 7,567.4 13,361.8
- - - - - -
Other Investments 135.7 247.8 249.7 274.7 299.7Liquid Investments - - - - -
Inventory 415.4 458.9 637.6 555.3 618.2
Debtors 485.4 737.0 1,082.2 833.0 927.3
Loans and Advances 646.6 1,560.1 2,603.8 2,787.0 3,102.5
Other Current Assets 396.1 697.1 795.1 760.1 846.1
Cash 17,228.0 20,264.5 21,025.2 20,506.0 17,272.3
Total Current Assets 19,171.5 23,717.6 26,143.8 25,441.3 22,766.5
Creditors 771.9 947.0 1,375.2 1,110.6 1,236.4
Provisions 1,008.8 1,171.6 1,872.8 1,554.9 1,730.9
Total Current Liabilities 1,780.7 2,118.6 3,248.0 2,665.5 2,967.3
Net Current Assets 17,390.8 21,599.0 22,895.8 22,775.8 19,799.2
Miscellaneous Expenses not written 14.5 - - - -
Assets side total 19,317.4 24,529.8 27,646.3 30,617.9 33,460.7Source: Company, ICICIdirect.com Research
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ICICI Securities Ltd|Retail Equity Research Page 22
Exhibit 53:Cash flow statement(Year-end March) FY11 FY12 FY13P FY14E FY15E
Profit after Tax 6,500.1 7,265.4 6,355.6 5,568.3 5,273.4
Depreciation 120.4 130.2 138.5 153.3 205.6
Cash Flow before WC changes 6,620.4 7,395.6 6,494.1 5,721.6 5,479.0
- - - - -
Net Increase in Current Assets (534.8) (1,509.6) (1,665.5) 183.3 (558.9)
Net Increase in Current Liabilities 433.1 337.9 1,129.5 (582.6) 301.8
Net cash flow from operat ing activities 6,518.7 6,223.9 5,958.0 5,322.4 5,222.0
- - - - -
(Purchase)/Sale of Fixed Assets (553.6) (1,036.8) (1,956.3) (3,220.0) (6,000.0)
Net Cash flow from Investing Activities (587.6) (1,113.8) (1,946.4) (3,245.0) (6,025.0)
- - - - -
Inc / (Dec) in Equity Capital - - - - -
Inc / (Dec) in Loan Funds - - - - -
Total Outflow on account of dividend (1,520.8) (2,073.6) (3,247.1) (2,597.7) (2,430.7)
Net Cash flow from Financing Activities (1,558.0) (2,073.6) (3,250.9) (2,596.6) (2,430.7)
- - - - -
Net Cash flow 4,373.1 3,036.5 760.7 (519.2) (3,233.7)
Beginning Cash and Cash Equivalent 12,854.9 17,228.0 20,264.5 21,025.2 20,506.0
Closing Cash/ Cash Equivalent 17,228.0 20,264.5 21,025.2 20,506.0 17,272.3
Source: Company, ICICIdirect.com Research
RatiosExhibit 54:Ratio Analysis (RoIC)
(Year-end March) FY11 FY12 FY13P FY14E FY15E
Per Share Data
EPS 16.4 18.3 16.0 14.0 13.3
Cash EPS 16.7 18.7 16.4 14.4 13.8
BV 48.5 61.6 69.4 76.9 84.1
Operating profit per share 21.8 22.5 18.6 17.0 16.9
Operating Ratios
EBITDA / Total Operating Income 76.0 79.2 68.9 66.2 59.2
PAT / Total Operating Income 57.2 64.5 59.4 54.9 46.7
Return Ratios
RoE 33.8 29.8 23.1 18.3 15.8
RoCE 44.4 36.0 26.3 21.5 19.4
RoIC 651.0 332.2 230.9 168.1 118.2
Valuation Ratios
EV / EBITDA 2.6 2.2 2.5 2.8 3.3
P/E 6.1 5.5 6.2 7.1 7.5
EV / Net Sales 2.0 1.7 1.8 1.9 2.0
Sales / Equity 0.6 0.5 0.4 0.3 0.3
Market Cap / Sales 3.5 3.5 3.8 3.9 3.5Price to Book Value 2.1 1.6 1.4 1.3 1.2
Turnover Ratios
Asset turnover 0.7 0.5 0.4 0.3 0.4
Debtors Turnover Ratio 23.4 15.3 9.8 12.2 12.2
Creditors Turnover Ratio 14.7 11.9 7.7 9.1 9.1
Solvency Ratios
Debt / Equity - - - - -
Current Ratio 10.8 11.2 8.0 9.5 7.7
Quick Ratio 10.5 11.0 7.9 9.3 7.5
Source: Company, ICICIdirect.com Research
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ICICI Securities Ltd|Retail Equity Research Page 23
NMDC Map
Exhibit 55: NMDC Mine Location
Source: Companys DHRP
Exhibit 56:NMDC major customers
Source: Companys DHRP
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ICICI Securities Ltd|Retail Equity Research Page 24
Appendix: Global iron ore industry
Iron ore is the key input required in the steel making process. The worldreserves of crude ore are estimated to be around 170 billion tonnes withiron ore content of ~80 billion tonne. Globally, China, Australia, Brazil,India and Russia are principal producers.
Exhibit 57:World iron ore reservesCrude Ore Reserves Iron Ore Content Reserves Avg Fe Grade
(million tonne) (million tonne) %
Australia 35000 17000 48.6
Brazil 29000 16000 55.2
Russia 25000 14000 56.0
China 23000 7200 31.3
India 7000 4500 64.3
others 51000 21300 41.8
Total 170000 80000 47.1
Country
Source: Mineral Commodity Summaries,2012, ICICIdirect.com Research
Exhibit 58:World iron ore production
2052 22052275
26203012
0
500
1000
1500
2000
2500
3000
3500
2007 2008 2009 2010 2011
milliontonne
Source: World Mineral Production, ICICIdirect.com Research
During 2007-11, the worlds total iron ore production has increased at aCAGR of 10.1% from 2.1 billion tonne in 2007 to 3.0 billion tonne in 2011.
China leads sea borne iron ore trade.
Global steel output in CY12 increased to 1.55 billion tonnes from 1.53billion tonnes in 2011 while the global seaborne iron ore trade increasedfrom 986 MT in 2011 to 1090 MT in 2012. China is the worlds largestimporter of iron ore and is also the major driver of worlds sea borne ironore trade. In CY12, the Chinese import of iron ore increased to 745 MT, anincrease of 8.4% over the previous year
Exhibit 59:World iron ore producers (major)
299 342 394 433 488355 351 331
372 460
707 824880
1078
1327213
213 219
208
169
105100 92
96
104
0
500
1000
1500
2000
2500
3000
2007 2008 2009 2010 2011
milliontonne
Australia Brazil China India * Russia
Source: World Mineral Production, ICICIdirect.com Research
*Indian numbers ending financial year (March)
Exhibit 60:Imports to China
146 184262 265 297
35298101
143 131143
165
8091
107 9773
33
1215
34 30 3641
0
100
200
300
400
500
600
700
2007 2008 2009 2010 2011 2012
milliontonne
Austral ia Brazil India South Africa
Source: Bloomberg, ICICIdirect.com Research
During the period under review, China, Australia and Brazil reported ahealthy production CAGR of 17.0%, 13.0% and 6.7%, respectively. Ironore production in Russia remained flat during the same period while ironore production In India de-grew at a CAGR of 5.7% in the correspondingperiod. During CY07-12, Australias iron ore export to China increased at a
CAGR of 19% while that of Brazil increased at a CAGR of 11%. However,for India it declined at a CAGR of 16% in the corresponding period.
CAGR: 10.1%
384444
619745687628
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CICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
arget price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively; with strong conviction
Buy: Between 10% and 15%/20% for large caps / midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head Research [email protected] Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,Road No. 7, MIDC,Andheri (East)
Mumbai 400 093
We /I, Dewang Sanghavi MBA (FIN) Shashank Kanodia MBA (CM)research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report
ccurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific
ecommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
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