Brokerage firm Kotak Securities has upgraded NMDC stock to an 'add' from a 'reduce' with a fair value (target price) of ₹140, implying an 11.5% upside from the stock's September 15 closing price of ₹125.55 on BSE.
The brokerage firm believes that the risk-reward is turning favourable for the stock.
The stock is down 6% year to date against a 3% gain in the benchmark Sensex.
"NMDC has cut iron ore prices, too aggressively, nearly 40% in the past three months post increase in export duty, to export parity level. We believe domestic prices have bottomed out and should recover with demand from the second half of the current financial year (H2FY23E)," said Kotak Securities.
"We also see limited downside to seaborne prices, despite weak demand in China, due to cost support. The steel plant demerger and listing will likely conclude in Q3FY23E and should unlock some value. We raise earnings and fair value to ₹140 factoring recovery in prices and higher value to the steel plant," the brokerage firm added.
NMDC has cut iron ore prices by 40% in H1FY23 mainly led by increase in export duty to 50% from 30% in May 2022. NMDC’s fine prices are now at 34% discount to import parity versus historic average of 20% and close to export parity prices, the brokerage firm highlighted.
Kotak believes believe iron ore prices have bottomed out and have upside risk led by (1) recovery in domestic demand allowing miners to raise prices to a premium to export parity, (2) upside in seaborne iron ore prices and (3) potential rollback of increase in export duty to 50% (from 30%).
"We are building a 9%/12% higher prices versus spot in H2FY23/FY2024E assuming no change in export duty in the base case," Kotak said.
The brokerage firm increased NMDC’s earnings per share (EPS) to ₹17.1/14.9/12.3 (from ₹16.4/12.7/9.8) factoring nearly 5% premium to export parity and reduced capex from FY2024-25E assuming deconsolidation of the steel plant.
"Our SoTP increases to ₹140 from ₹115 on higher earnings and increase in value of the steel plant. Rollback of the recent increase in export duty on iron ore would add further upside to our earnings and fair value. The stock trades at attractive 3.8 times EV/EBITDA or 6.2 times PER on FY2024E ex-steel plant," said Kotak.
According to a MintGenie poll, an average of 20 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
