We upgrade our rating on NMDC to ?overweight? from ?underweight? as the domestic iron ore pricing moves closer to import parity. We raise our 12-month price target to R210 (previously Rs 173), implying a target multiple of 5.8x FY14e EV/Ebitda.
We also increase our FY14e EPS by 3.3% on expectations of higher iron ore prices. We believe structural changes in the Indian iron ore industry will position India as a net importer (currently net exporter) of iron ore and move domestic prices towards import parity.
We believe that India?s iron ore industry looks poised for a structural shift. Based on our demand-supply model for the Indian iron ore segment, we expect domestic iron ore production to fall at a CAGR of 3.8% for FY12-15e versus an 8% increase in domestic demand.
Output is steadily falling as several states (Karnataka, Goa and, now, Orissa) have imposed caps/restrictions on iron ore mining. Thus, we expect India to turn into a net importer of iron ore (ex-Goa) by FY14 from being the third-largest exporter if the proposed curbs are put in place.
Our checks on iron ore supply in India suggest that imports on the western coast have increased quite significantly (from South Africa). Indeed, we even expect imports of iron ore to India?s iron-ore-rich eastern states. Overall, we expect supplies in India to remain structurally challenged for the next few years.
The key premise of our negative stance on Indian miners has been that iron ore prices in India were at a significant discount to seaborne prices (based on export net-back pricing model). This is changing steadily in favour of miners (latest NMDC prices imply a 219% premium over export net-back model).
With the Indian market moving towards a deficit, we expect the gap in domestic and seaborne prices to narrow further (to c7% by FY16e versus c37% in FY11). Export duties have peaked and a drop in export duty could mean further upside to NMDC?s realisations.
The Indian iron ore mining impasse, on the other hand, has resulted in speedy approvals for NMDC as it has stood out as ?the ethical miner?.
Barclays
