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Strong performance continues; maintain Buy


We maintain Buy on NMDC with a target price of Rs235 and reiterate that stock is our
top pick in large cap metals space as we i) see volume traction continuing with
favorable domestic demand supply situation and expect volumes of 34/36MT for
FY15E/16E, and ii) believe pricing outlook remains strong though we see moderation
in prices going ahead (factored in our est). Q1 results were strong with margins at
69.1% (up 550bps QoQ and 200bps above our est.) led by lower costs. We expect
EBITDA/PAT CAGR of 16%/14.1% during FY14-16E and maintain our earnings
estimates. Undemanding valuations and strong dividend yield are added positives.
EBITDA stays robust led by volumes; margins improve: EBITDA at Rs24bn (up
~26% YoY) was robust on account of strong volume performance (up 18% YoY at
8.6MT) and stable realizations. Margins improved by 550bps QoQ to 69.1% on account
of lower freight and other expenses (as higher expenses were booked on shipments
meant for exports during Q4 which was actually shipped in Q1). Blended realizations
stood at Rs4052/t (lower by 1.9% QoQ) on account of lower realizations on export
sales. Export volumes stood at 0.67MT (out of which ~0.2MT was sold from the
inventory at port available from last quarters shipments).
Essar pipeline driving strong volumes despite intermittent disruptions: Essar
slurry pipeline restarted in Jan14 and has been shipping ~20kt/day but was twice
affected by Naxal attacks in May14 and July14. Quick restarts on both occasions
kept the impact on production minimal but any material damage going ahead can
impact volumes for NMDC adversely. Essar pipeline can transport ~7.2MT/yr on
stable operations while we have been factoring in ~4MT from Essar pipeline on an
annual basis. NMDCs July14 volumes have remained strong at~2.5MT (up ~19%
YoY). Q1 volumes for Chhattisgarh/Karnataka stood at 6.1/2.5MT (up 21%/12%)
while fines:lumps mix stood at 66:34.
Earnings estimates maintained, outlook remains strong: We maintain our
volume and EBITDA estimates for FY15E/16E but believe that damage free
operations of Essar pipeline over the next few years can lead to upside in our
volume estimates of 34/36MT for FY15E/16E. We maintain our fines/lumps price
assumptions for FY15E at Rs3010/Rs4400 (vs current Rs3160/Rs4600) as we expect
price moderation in both lumps and fines in H2FY15E. We remain constructive on
fines pricing in medium to long term on the back of increasing demand in domestic
market on account of increasing pellet production from new pellet plants.
Valuation and risks maintain Buy: We maintain our structurally positive stance
on NMDC and at the CMP of Rs173, the stock trades at undemanding valuations of
5.1/4.6x FY15E/16E EV/EBITDA. Strong balance sheet and high dividend yield are
added positives. We maintain our valuation multiple of 6.5x June16E EV/EBITDA
and maintain Buy with a target price of Rs235. Risks to our call are lower volumes in
FY15E, lower prices and unfavourable use of the cash pile.
Y/E Mar (Rs mn) Q1FY15 Q1FY14 YoY% Q4FY14 QoQ% Q1FY15E Var %
Net sales 34,767 28,691 21.2 38,845 (10.5) 34,837 (0.2)
Employee costs 1,808 1,483 21.9 2,559 (29.3) 1,702 6.2
Selling & Freight expenses 3,310 2,911 13.7 4,467 (25.9) 3,000 10.3
EBITDA 24,021 19,037 26.2 24,697 (2.7) 23,387 2.7
EBITDA margin (%) 69.1 66.4

63.6

67.1

Depreciation 400 364 10.1 431 (7.1) 387 3.5
Other income 5418 5,224 3.7 5,275 2.7 5,125 5.7
PBT 29,039 23,897 21.5 29,996 (3.2) 28,126 3.2
Provision for tax 9,889 8,176 21.0 10,356 (4.5) 9,563 3.4
-effective tax rate 34.1 34.2

34.5

34.0

PAT 19,150 15,722 21.8 19,640 (2.5) 18,563 3.2
Source: Company, Centrum Research

Target Price Rs235 Key Data
CMP* Rs173.5 Bloomberg Code NMDC IN
Upside 35.4% Curr Shares O/S (mn) 3,964.7
Previous Target Rs235 Diluted Shares O/S(mn) 3,964.7
Previous Rating Buy Mkt Cap (Rsbn/USDbn) 687.7/11.3
Price Performance (%)* 52 Wk H / L (Rs) 196.2/102.2
1M 6M 1Yr 5 Year H / L (Rs) 489.9/84.4
NMDC IN 7.9 19.8 59.5 Daily Vol. (3M NSE Avg.) 3841964
NIFTY 3.6 27.0 37.7
*as on 12 August 2014; Source: Bloomberg, Centrum Research
Shareholding pattern (%)*
Jun-14 Mar-14 Dec-13 Sep-13
Promoter 80.0 80.0 80.0 80.0
FIIs 7.0 6.2 6.0 5.3
Dom. Inst. 10.3 10.6 10.5 10.7
Public & Others 2.8 3.2 3.5 4.0
Source: BSE, *as on 12 August 2014
Operational metrics

Source: Company, Centrum Research
Centrum vs. Bloomberg Consensus*
Particulars
(Rs bn)
FY15E FY16E
Centrum BBG Chg (%) Centrum BBG Chg (%)
Net Sales 139.2 130.9 6.4 148.3 140.0 5.9
EBITDA 94.7 85.9 10.2 104.5 91.9 13.8
PAT-adj. (Rs) 76.1 69.4 9.6 83.0 72.9 13.8

Bloomberg Consensus*
Centrum
Target
Price
(Rs)
Variance
(%)
BUY SELL HOLD
Target Price
(Rs)
25 5 9 187 235 25.5
*as on 12 August 2014; Source: Bloomberg, Centrum Research Estimates
















Abhisar Jain, CFA, abhisar.jain@centrum.co.in, 91 22 4215 9928


Y/E Mar (Rs bn) Revenue YoY (%) EBITDA EBITDA (%) Adj. PAT YoY (%) Adj. EPS (Rs) RoE (%) RoCE (%) PE (x) EV/EBITDA (x)
FY13 107.0 (5.0) 73.7 68.9 63.4 (12.7) 16.0 23.1 24.4 10.8 6.5
FY14 120.5 12.7 77.7 64.4 63.8 0.5 16.1 21.3 22.1 10.8 6.5
FY15E 139.2 15.5 94.7 68.0 76.1 19.4 19.2 22.5 23.8 9.0 5.1
FY16E 148.3 6.5 104.5 70.5 83.0 9.0 20.9 21.8 23.0 8.3 4.6
FY17E 151.7 2.3 105.0 69.2 83.9 1.1 21.2 19.9 20.8 8.2 4.5
Source: Company, Centrum Research Estimates
7.3 6.5 7.3 9.4 8.6
3,956
3,810 3,844
4,132
4,052
1,000
2,000
3,000
4,000
5,000
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15
Sales Volume (MT) Blended Realization/t (Rs)
EBITDA/t (Rs)
Metals
Buy
Result Update 12 August 2014
INDIA
NMDC


2
NMDC

Margins improve, pricing expected to moderate from H2
Margins lifted by lower costs on exports due to inventory sales from port - Margins improved
by 550bps QoQ on account of strong volume performance and lower costs (freight and other
expenses). This was on account of dispatch of ~0.2MT of volumes for exports from port (expense
for which was booked in the last quarter itself). Employee costs were lower QoQ as there was one-
off provision in the last quarter of ~Rs700mn for arrears for workmen related to pending wage
hikes.
Karnataka volumes stay strong, Chhattisgarh volumes lifted by Essar pipeline - Karnataka
volumes were strong at 2.5MT in Q1FY15 (up ~12% YoY) and were a positive surprise.
Chhattisgarh volumes stood at ~6.1MT (up 22% YoY) lifted by higher sales through Essar pipeline.
Lumps: fines ratio stood at 34:66 during the quarter.
Pricing expected to moderate in H2FY15E, fines pricing outlook remains strong - We expect
NMDC to take price cuts in both lumps and fines in H2FY15E as global iron ore prices remain weak
and production in Orissa is expected to normalize slowly coupled with gradual start of supplies
from Goa. We expect fines pricing to remain strong in medium term due to higher demand from
increasing pellet production in the domestic market (current pellet capacity stands at ~70MT but
utilization is less than 65% due to fines shortage and low steel demand). We expect average
pricing of Rs3010/4400 per tonne for fines/lumps respectively in FY15E.
Exhibit 1: Iron ore and pellet price trend (Rs/tonne)

Source: Bloomberg, Centrum Research Estimates
Exhibit 2: NMDC monthly price trend (Rs/tonne)

Source: Company, Centrum Research Estimates


3,000
3,500
4,000
4,500
5,000
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6,000
5000
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Pellet prices-Chhattisgarh Pellet prices-Orissa
China 63% FE CFR (Rs/t) NMDC Blended avg (RHS)
NMDC pricing delinked to global
iron ore prices and driven by
domestic pellet prices
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Fines (LHS) Lumps (RHS)
Sharp uptick in pricing in last
6 months, but we see
moderation in H2FY15E
3160
4600 2610
4300
3010
4300
Domestic pellet prices
have remained strong
while global iron ore prices
have fallen sharply in the
last few quarters
NMDC expected to take
price cuts in H2FY15E
once iron ore mining
restarts in Orissa


3
NMDC

Exhibit 4: Sensitivity analysis (FY15E)
Sensitivity to key variables % change % impact on EBITDA % impact on EPS
Sales volume 1 1.1 0.9
Realization 1 1.2 0.9
Source: Company, Centrum Research Estimates
Exhibit 3: 1 year forward EV/EBITDA chart Exhibit 4: 1 year forward P/E chart

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates
Exhibit 5: Comparative Valuations
Sector
Mkt Cap
(USD mn)
CAGR FY14-FY16E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%)
Rev. EBITDA PAT FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E
NMDC* 11,217 10.9 16.0 14.1 64.4 68.0 70.5 10.8 9.0 8.3 6.5 5.1 4.6 21.3 22.5 21.8 4.9 4.6 5.2
Fortescue Met. Grp. 13,364 1.1 (11.4) (18.2) 46.9 38.8 36.1 5.2 6.8 7.7 3.8 4.2 4.4 41.3 25.3 18.8 4.4 3.9 4.1
Cliffs Nat res. 2,770 (12.5) (29.9) NA 26.6 15.5 17.1 7.5 (207.8) (103.9) 5.5 10.4 9.9 7.3 0.6 (0.1) 3.3 3.3 3.3
Forrexpo plc 1,312 (3.4) (12.8) (19.0) 31.7 32.2 25.9 3.0 3.1 4.4 5.2 3.1 4.0 16.1 16.1 10.8 3.2 3.2 3.3
Kumba Iron Ore 10,502 (3.7) (14.7) (17.3) 55.9 49.0 43.8 7.2 9.1 10.4 5.0 4.7 5.4 86.3 54.9 43.7 11.5 8.4 7.2
Source: Bloomberg consensus, *Centrum Research Estimates


0
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EV/EBITDA Mean
Mean + Std Dev Mean - Std Dev
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P/E Mean
Mean + Std Dev Mean - Std Dev


4
NMDC

Exhibit 6: Quarterly Financials
Particulars (Rs mn) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15
Net Sales 26,118 20,468 32,021 28,691 24,781 28,215 38,845 34,767
Increase/decrease in Stocks in trade (486.5) (494.9) (730.7) 242.9 487.8 (58.2) (803.2) 503.9
Consumption of raw materials 62 85 76 39 80 88 59 62
Stores & Spares Consumed 398 640 1,005 618 615 833 1,389 563
Employee Expenses 1,440 1,392 1,615 1,483 1,447 1,574 2,559 1,808
Selling expenses including freight out 2,127 1,764 3,929 2,911 3,664 2,432 4,467 3,310
Royalty & cess 2,211 2,047 3,035 2,236 1,824 2,256 3,289 2,715
Total Other Expenses 1,020 1,131 5,616 2,125 1,745 2,081 3,189 1,785
Operating Profit (Core EBITDA) 19,347 13,904 17,477 19,037 14,918 19,012 24,697 24,021
Depreciation 332 339 387 364 348 362 431 400
EBIT 19,016 13,565 17,090 18,673 14,570 18,650 24,266 23,621
Interest 0 0 132 0 0 0 0 0
Other Revenue/Income 5,832 5,571 5,495 5,224 5,402 5,093 5,275 5,418
Other Exceptional Items - - - - - - (455) -
Profit Before Tax 24,848 19,137 22,453 23,897 19,972 23,743 29,996 29,039
Tax 8,062 6,209 7,804 8,176 6,788 8,070 10,356 9,889
Tax rate (%) 32 32 35 34 34 34 35 34
Profit After Tax 16,786 12,928 14,650 15,722 13,184 15,673 19,640 19,150

Growth (%)
Net Sales (14.7) (27.5) 23.4 1.0 (5.1) 37.8 21.3 21.2
EBITDA (20.6) (38.5) (11.6) (17.3) (22.9) 36.7 41.3 26.2
Adj. PAT (14.5) (30.5) (10.8) (17.5) (21.5) 21.2 34.1 21.8

Margin (%)
EBITDA 74.1 67.9 54.6 66.4 60.2 67.4 63.6 69.1
EBIT 72.8 66.3 53.4 65.1 58.8 66.1 62.5 67.9
PAT 64.3 63.2 45.7 54.8 53.2 55.5 50.6 55.1

Key Drivers
Iron Ore Sales (MT) 5.9 5.3 8.2 7.3 6.5 7.3 9.4 8.6
Blended realizations/tonne (Rs) 4,465 3,837 3,886 3,956 3,810 3,844 4,132 4,052
Source: Company, Centrum Research
Exhibit 7: Key Performance Indicators
Assumptions FY13 FY14 FY15E FY16E FY17E
Iron Ore Volumes (MT)
Chhattisgarh 18.3 21.0 24.5 26.5 27.5
Karnataka 8.0 9.4 9.5 9.5 10.0
Total 26.3 30.5 34.0 36.0 37.5
Export 1.6 2.3 2.0 1.0 1.0
Blended Realizations (Rs/t) 4,071 3,958 4,070 3,945 3,833
Source: Company, Centrum Research Estimates










5
NMDC

Financials
Exhibit 8: Income Statement
Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Net Sales (incl other op inc) 1,06,987 1,20,533 1,39,215 1,48,332 1,51,725
Mining & manf. expenses 5,799 7,062 6,807 7,284 7,794
% of net sales 5.4 5.9 4.9 4.9 5.1
Employee expenses 9,524 9,604 12,454 12,783 12,937
% of net sales 8.9 8.0 8.9 8.6 8.5
Royalty expenses 8,180 13,474 10,426 5,213 5,213
% of net sales 7.6 11.2 7.5 3.5 3.4
EBITDA 73,724 77,664 94,667 1,04,506 1,04,988
EBITDA Margin (%) 68.9 64.4 68.0 70.5 69.2
Depreciation & Amortisation 1,385 1,504 1,546 1,686 1,826
EBIT 72,339 76,160 93,121 1,02,820 1,03,162
Interest expenses 132 - - - -
Other Income 22,445 20,995 20,500 21,000 22,000
PBT 94,651 97,154 1,13,621 1,23,820 1,25,162
Provision for tax 31,228 33,391 37,495 40,860 41,303
Effective tax rate (%) 33.0 34.4 33.0 33.0 33.0
Net Profit Adjusted 63,424 63,764 76,126 82,959 83,858
Source: Company, Centrum Research Estimates
Exhibit 9: Key Ratios
Y/E March FY13 FY14 FY15E FY16E FY17E
Growth Ratio (%)
Revenue (5.0) 12.7 15.5 6.5 2.3
EBITDA (17.4) 5.3 21.9 10.4 0.5
Adjusted Net Profit (12.7) 0.5 19.4 9.0 1.1
Margin Ratios (%)
PBIT Margin 67.6 63.2 66.9 69.3 68.0
PBT Margin 88.5 80.6 81.6 83.5 82.5
Adj. PAT Margin 59.3 52.9 54.7 55.9 55.3
Return Ratios (%)
ROE 23.1 21.3 22.5 21.8 19.9
ROCE 24.4 22.1 23.8 23.0 20.8
ROIC 90.9 56.2 51.2 46.0 37.5
Turnover Ratios (days)
Debtors 36.9 43.9 35.0 35.0 35.0
Inventory 21.7 20.6 20.0 20.0 20.0
Creditors 110.8 41.8 70.0 70.0 70.0
Net Working capital 63.6 137.6 85.0 85.0 0.0
Solvency Ratios (x)
Debt-equity 0.0 0.0 0.0 0.0 0.0
Net debt-equity (0.8) (0.6) (0.6) (0.6) (0.5)
Current ratio NA NA NA NA NA
Interest coverage ratio 8.0 17.8 9.9 9.6 9.8
Dividend
Dividend per share 7.0 8.5 8.0 9.0 9.0
Dividend payout (%) 51.2 61.8 48.7 50.3 49.8
Dividend yield (%) 4.0 4.9 4.6 5.2 5.2
Per share Ratios (Rs)
Basic EPS - reported 16.0 16.1 19.2 20.9 21.2
Basic EPS - adjusted 16.0 16.1 19.2 20.9 21.2
FDEPS - reported 16.0 16.1 19.2 20.9 21.2
FDEPS - adjusted 16.0 16.1 19.2 20.9 21.2
Cash earnings per share 16.3 16.5 19.6 21.3 21.6
Book value 69.4 75.6 85.5 95.9 106.5
Valuation (x)
P/E (Fully Diluted) 10.8 10.8 9.0 8.3 8.2
P/BV 2.5 2.3 2.0 1.8 1.6
EV/EBITDA 6.5 6.5 5.1 4.6 4.5
EV/Sales 4.5 4.2 3.5 3.2 3.1
M-cap/Sales 6.4 5.7 4.9 4.6 4.5
Source: Company, Centrum Research Estimates
Exhibit 10: Balance Sheet
Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Equity Share Capital 3,965 3,965 3,965 3,965 3,965
Reserves & surplus 2,71,175 2,95,963 3,34,979 3,76,189 4,18,298
Shareholders' fund 2,75,140 2,99,928 3,38,944 3,80,154 4,22,264
Total Debt - - - - -
Deferred Tax Liability 1,045 1,073 1,073 1,073 1,073
Total Capital Employed 2,76,185 3,01,001 3,40,016 3,81,226 4,23,335
Gross Block 47,728 52,728 57,728 62,728 67,728
Less: Acc. Depreciation 13,950 15,454 17,001 18,687 20,513
Net Block 33,778 37,274 40,728 44,041 47,215
Capital WIP 13,772 28,772 58,772 88,772 1,18,772
Net Fixed Assets 47,550 66,046 99,499 1,32,813 1,65,987
Investments 2,497 2,504 2,504 2,504 2,504
Cash 2,07,347 1,86,873 2,05,449 2,11,222 2,19,367
Trade Receivables 10,822 14,484 13,349 14,224 14,549
Loans & Advances 26,036 30,693 30,513 32,511 33,255
Inventories 6,375 6,812 7,628 8,128 8,314
Total Current Asset 2,58,474 2,46,120 2,64,567 2,74,212 2,83,798
Current Liab. & Prov. 32,481 13,814 26,699 28,447 29,098
Net Current Asset 2,25,994 2,32,307 2,37,868 2,45,765 2,54,700
Total Assets 2,76,185 3,01,001 3,40,016 3,81,226 4,23,335
Source: Company, Centrum Research Estimates
Exhibit 11: Cash Flow
Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E
PBT 94,651 97,609 1,13,621 1,23,820 1,25,162
Interest 132 - - - -
Depreciation 1,385 1,504 1,546 1,686 1,826
Change in working capital (5,367) (26,787) 13,014 (2,123) (790)
Tax 31,228 33,391 37,495 40,860 41,303
Cash flow from operations 59,618 38,963 90,686 82,522 84,895
Change in fixed assets 22,000 20,000 35,000 35,000 35,000
Change in investments 19 7 - - -
Cash flow from investments (22,019) (20,007) (35,000) (35,000) (35,000)
Dividends paid 32,472 39,430 37,111 41,749 41,749
Interest paid 132 - - - -
Cash flow from financing (32,604) (39,430) (37,111) (41,749) (41,749)
Net cash flow 4,995 (20,474) 18,576 5,773 8,145
Opening cash balance 2,02,352 2,07,347 1,86,873 2,05,449 2,11,222
Closing cash balance 2,07,347 1,86,873 2,05,449 2,11,222 2,19,367
Source: Company, Centrum Research Estimates


6
NMDC

Appendix A
Disclaimer
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this report is accurate or complete.


7
NMDC

The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking
and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this
report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.
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Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn
Buy Upside > 25% Upside > 20% Upside > 15%
Hold Upside between -25% to +25% Upside between -20% to +20% Upside between -15% to +15%
Sell Downside > 25% Downside > 20% Downside > 15%

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager
Registration Nos.
CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233
DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)
CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012
PMS REGISTRATION NO.: INP000004383
MCX SX (Currency Derivative segment) REGN. NO.: INE261454230
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