idirect nmdc ic

7/29/2019 Idirect Nmdc Ic

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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

[email protected]

shank Kanodia

[email protected]


2/25

ICICI Securities Ltd|Retail Equity Research Page 2

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%


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


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


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


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


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



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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


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


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


Exhibit 12:Total sales bifurcation (FY12) (| crore)

Sponge Iron,

66 Cr, 0.6%

Diamonds,10 Cr , 0.1%

Iron Ore, 11168

Cr, 99.3%


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%).


6/25


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


7/25


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


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



8/25


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


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.


9/25


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


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


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)


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


|

pertonne

Raw Materials Expense Employee Expense

Royalty & Cess Selling & Services

Other Expenses


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.


10/25


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


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


%

0

100

200

300

400

500

600

700

%

ROCE (LHS) ROE (LHS) ROIC (RHS)



11/25


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


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


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


12/25


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


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


13/25


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


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


14/25


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


|

crore


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


milliontonne

3000

3300

3600

3900

4200

4500

|/tonne

Volume Blended realisation


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


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%


15/25


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


|

crore

40

50

60

70

80

90

%

EBITDA (| crore) EBITDA Margin (%)


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


|p

ertonne

Blended Realization (L.H.S) EBITDA/tonne (R.H.S)


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


|

crore

45%

50%

55%

60%

65%

70%

75%

PAT (| crore) PAT Margin


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


|c

rore

-

2.0

4.0

6.0

8.0

10.0

12.0

%

Cash & Cash Equivalents Other Income Yie ld


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


16/25


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


%

RoCE RoE


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


|

crore

0

5

10

15

20

25

30

35

%

CWIP Networth CWIP as a % of Networth


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.


17/25


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%



18/25


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)


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


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


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


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



19/25


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


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


20/25


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.


21/25


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


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


22/25


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


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



23/25


NMDC Map

Exhibit 55: NMDC Mine Location

Source: Companys DHRP

Exhibit 56:NMDC major customers

Source: Companys DHRP


24/25


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


25/25

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

[email protected]

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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nderwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of

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enerally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts

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he information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and

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