We reiterate our outperform rating on NMDC and raise our target price to R188 per share (earlier R176), valuing the share at 10x September 2016e. At 7x P/E, 3.4x EV/ebitda at 8% dividend yield on FY15e, we believe NMDC is looking cheaper than most peers.
NMDC clocked all-time record sales in February 14, up 32% y-o-y, with volumes up 17% y-o-y in eleven months of FY14. Restart of the slurry pipeline and commissioning of a new mining capacity should drive a 12% volume CAGR over FY13-16e. Further, we note a strong pricing outlook as domestic iron ore balance moves in favour of miners.
After 6 years of stagnant volumes, NMDC has surprised all estimates with 17% y-o-y volume growth in eleven months of FY14e and 32% y-o-y growth in February 14. NMDC is increasing its mining capacity from 34 mtpa to 48 mtpa by FY16.
Of this, a 7 mtpa mine (Mine 11B) is ready for commissioning in FY15 and NMDC has 2 mt of iron ore inventory. We raise our sales volume forecast 6-7% to 34 mt and 37 mt for FY15-16e but still think risks are to the upside. A 1-mt rise in volume impacts EPS by 3%.
Within two months of restarting, the 8-mtpa slurry pipeline has seen impressive ramp-up to run-rate of 7.3 mntpa. NMDC can easily beat our consensus volume estimate of 37 mt in FY16. Despite a 20% fall in global iron ore prices, Indian prices are up 8% in the last four months.