NMDC - Volume Growth, Capacity Enhancement To Drive Next Leg Of Performance: Motilal Oswal

Motilal Oswal Report

The domestic demand for iron ore is expected to move in tandem with infrastructure and construction growth. NMDC Ltd., being the largest domestic iron ore miner, is expected to produce ~45 million tonne of iron ore in FY24 (production for 11 months-FY24 has crossed 40.2 mt), surpassing production of over 40 mt for the third year in a row. It is well on track to exceed 50 mt of production in FY25E and 55mt in FY26E.

NMDC has planned capex for several evacuation and capacity enhancement projects, which should improve the product mix and augment its production capacity to ~100 mt by FY29-30E.

The domestic steel sector is well placed compared to its global peers and the domestic crude steel capacity is expected to reach ~175 mt in FY24 with ~82% capacity utilisation. This would translate to ~282 mt of iron ore requirement in FY24E, with NMDC commanding a ~16% market share.

Similarly, as crude steel capacity inches up to 300 mt by FY30-31, total demand for iron ore would be ~435-445 mt. We believe NMDC, with a dominant presence in the domestic market, is well placed to capitalise on the growth opportunities ahead.

In line with the recent correction in international prices, NMDC has reduced prices by Rs 200/tonne for lumps and Rs 250/t for fines. Though the price cuts will weigh on the company’s near-term growth, NMDC aims to continuously improve volumes to offset the impact.

NMDC trades at 4.5 times FY26E enterprise value/Ebitda and 1.7 times FY26E price/book. We reiterate our Buy rating on the stock with a target price of Rs 260.

Key risks:

1. ~105 iron ore blocks have been auctioned since FY16 (~57 blocks auctioned in FY23 and FY24E) of which ~30 mines are operational; when the remaining captive mines become operational, it would lead to an increase in the supply of iron ore, thus increasing the competition for NMDC;

2. NMDC relies heavily on a few customers, which exposes the company to business risk.

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