In their latest research note, brokerage firm YES Securities initiated coverage on NMDC (National Mining Development Corporation) with a 'buy' rating and a target price of ₹137 apiece, which reflects an upside of 23% from the stock's current trading price of ₹111.5.
The company is India’s largest producer of iron ore, which is crucial for the steel industry. Operating under the Ministry of Steel, NMDC is a ‘Navratna’ public sector enterprise and owns and operates highly mechanised iron ore mines.
It is one of the low-cost producers of iron ore in the world. It also operates Asia’s only mechanised diamond mine in India at Panna, Madhya Pradesh.
The brokerage's bullish outlook stems from the following key factors:
Aggressive mine capacity expansion to meet the upcoming demand: The company plans to expand its current capacity of 45 mtpa to 67 mtpa in the next 2–3 years, and it believes it can reach levels of 70–75 mtpa in the same timeline if the current macroeconomic pressures cool off in the short term.
In addition to mining and evacuation expansion, the company is also planning to set up a pellet plant to explore the global pellet industry and cash in on the upbeat iron ore prices. The company expects to incur a capex of Rs. 3,000 crores per annum going forward to achieve its goal of a 100 mtpa mining capacity by 2030, said YES Securities.
Advantages of steel plant demerger: NMDC's strategic demerger of its steel plant into a separate entity named "NMDC Steel" has unlocked long-term benefits. The 3 mtpa steel-making capacity embodies a forward integration move, aligning with the National Steel Policy, 2017, aimed at attaining 300 mtpa capacity by FY 2030–31.
The brokerage believes that the demerger will remove the capex overhang and improve the quality of NMDC’s balance sheet, which is clearly a step in the right direction.
The company had incurred ₹23,000 crore in capex to set up the plant, injecting cash from its high-margin iron ore business. Post the demerger, NMDC can focus on its iron ore business, which has expansions planned in the coming years, and the company can gainfully use the internal cash accruals for the same, it said.
Preferred iron ore supplier: The domestic steel players, apart from the backward integrated steel producers, need to source iron ore needs either domestically or through global markets. India, being rich in iron ore reserves and having high-grade ore at its disposal, has iron ore deposits all throughout its eastern belt, primarily in the states of Jharkhand and Orissa.
NMDC being one of the oldest and a holder of the maximum number of mines in India becomes the perfect supplier for the domestic companies to source the raw material needs as compared to global suppliers. NMDC pricing is on a big discount as compared to the global players. Players like JSW Steel, Arcelor Mittal Nippon Steel, Jindal Steel and Power all source their raw material needs through NMDC, the brokerage highlighted.
Strong demand from the domestic steel industry: India is the only nation in the world with a growing steel capacity, and the government is taking proactive measures to help steel producers expand capacities both through greenfield and brownfield routes, the brokerage stated.
The Indian steel industry is projected to reach 300 mtpa capacity by 2030, almost double the current capacity. Most capacities would happen through the BF/BOF route, and NMDC will stay focused on domestic players for the foreseeable future. There is ample scope for expansion given the burgeoning iron ore demand in India and growing steel capacities, the brokerage added.
19 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.