scorecardresearchNMDC post demerger: Here's why these 3 brokerages see an upside of up to

NMDC post demerger: Here's why these 3 brokerages see an upside of up to 59%

Updated: 24 Feb 2023, 11:11 AM IST

NMDC has demerged its steel asset as a separate company NMDC Steel whose shares have been listed on the stock exchange on February 20, 2023.

NMDC stock is under brokerage radar.

NMDC stock is under brokerage radar.

Brokerage firms see an up to 59 percent upside in the NMDC stock after the demerger of its steel unit NMDC Steel from it.

NMDC has demerged its steel asset as a separate company NMDC Steel whose shares have been listed on the stock exchange on February 20, 2023.

National Mineral Development Corporation (NMDC), a Navratna Public Sector Enterprise under the Ministry of Steel, Government of India, is the single largest producer of iron ore in India.

As Mint reported, NMDC posted a net profit of 903.89 crore in Q3FY23 compared to 2,046.88 crore in Q3FY22, representing a fall of 55 percent year-on-year (YoY).

Its revenue from operations fell 36.66 percent YoY to 3,719.99 crore in Q3FY23 compared to 5,873.77 crore in the corresponding quarter last year.

Brokerage firm Emkay Global Financial Services has initiated coverage on NMDC stock with a 'buy' recommendation, pegging a 12-month target price of 180.

The target price implies a 58.87 percent upside from the stock's February 23 closing of 113.30 on BSE.

"We value NMDC on FY25E EV/EBITDA multiple of 4 times, at a fair value of 180 per share, which implies FY25E price-to-earnings ratio of 8.5 times and free cash flow yield of 12 percent," said Emkay.

Note: EV/EBITDA is a ratio that compares a company's enterprise value (EV) to its earnings before interest, taxes, depreciation and amortization (EBITDA).

Emkay said demerging the steel asset has been the right strategy which, apart from unlocking value for shareholders, will also materially improve NMDC’s return profile as the big-ticket item has moved off its balance sheet.

Emkay underscored that NMDC's iron-ore business remains attractive as its mines have high-grade, low-impurity iron-ore which, when coupled with favourable geological conditions, is placed among the lowest cash-cost mines globally.

The brokerage firm said that NMDC's management is also considering setting up a sizeable pellet business, which is low capital cost forward integration. Besides, pellets have good global demand. A large foray by NMDC into the pellet business would act as a natural hedge for any volatility in its iron-ore sales volume due to business cyclicality, etc.

Emkay believes NMDC would indirectly benefit from this oligopolistic setup in the high-quality, seaborne iron ore sector.

"Majority of the high-grade, global seaborne iron ore is supplied by a handful of players, mainly from Australia and Brazil; to that extent, we believe the industry is a snug oligopoly, with inherent pricing power," said Emkay.

"Iron ore in India is sold on an export-parity basis. While export parity pricing by itself is not advantageous for NMDC, there is a good correlation with global seaborne iron ore prices. Hence, NMDC too would indirectly benefit from this oligopolistic setup," Emkay added.

Brokerage firm Motilal Oswal Financial Services has maintained a 'buy' call on the stock with a target price of 155.

As per the brokerage firm, robust domestic demand, rollback of export duty on steel and the absence of Capex overhang from the steel business are expected to augur well for the stock.

"Q4 is a stronger quarter with pickup in heavy capex infrastructure and construction activities, which will lead to higher steel consumption, and consequently, drive up iron ore demand," said Motilal Oswal.

"With the export of steel and pellets picking up pace and no drag from the steel business, we expect NMDC to continue its volume growth journey. We believe NMDC is well-placed to capitalise on the growth opportunity ahead," said the brokerage firm.

Brokerage firm Phillip Capital has a 'neutral' call on the stock. It raised the target price for the stock to 130 from 115, valuing the stock at 5 times FY24E EV/EBITDA.

Phillip Capital pointed out that after the export duty reduction, iron ore prices in India have increased rapidly aided by increased iron ore prices in the international market on expectations of China reopening and subsequent exports of pellets which attracts zero duty.

"While we feel the majority of the price hikes are already factored in, the financial impact would get reflected in the next six months, prompting us to increase FY24 EBITDA by 10 percent. A good cash balance will ensure dividend yields will remain healthy at 6-8 percent which is a reason to hold the stock. However, the cash outgo for a 10 percent stake in NMDC steel is a bit negative," said Phillip Capital.

According to a MintGenie poll, an average of 19 analysts have a ‘strong buy’ call on the stock.

Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.

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First Published: 24 Feb 2023, 10:19 AM IST