Value trap: NMDC has reduce iron ore rates by 14-16% for September 2021 just after a sharp 40% correction in seaborne rates in the previous 3 months. A drop in Chinese steel production and danger of growing provide restrictions have been the important catalysts. We see additional downside to iron ore rates offered absence of expense assistance, ramp-up of India’s domestic provide and decrease Chinese steel volume. NMDC, regardless of low-cost valuations, should really stay beneath stress amid declining margins and restricted development visibility. SELL.
Seaborne iron ore rates collapse with growing demand danger from China: Seaborne iron ore rates have corrected by 20% in the previous one month and 40% because the peak of US$235/ton in May 2021. The weakness was anticipated by us, while the collapse has been steeper than anticipated. The important catalyst has been 7% yoy drop in July 2021 Chinese steel production. The iron ore market place is fearing weaker demand in China in 2HCY21 led by (1) decrease steel margins, (2) upcoming upkeep shutdowns by steel mills and (3) the danger of growing provide restrictions for China to have flat production in CY2021 (production was +13% yoy in 1HCY21 and 2HCY21 requires to be -10% more than 1HCY21). We estimate marginal expense at ~US$one hundred-110/ton for seaborne provide and a bearish demand outlook should really maintain seaborne iron ore rates beneath stress. We forecast downward trending seaborne rates – US$150/ 125/one hundred/ton for FY2022/23/24E.
Domestic provide recovering at a speedy pace: Iron ore supplies in India got impacted in FY2021 (production -17% yoy) due to transition problems. With sturdy seaborne rates and ramp-up of auctioned mines, iron ore production is recovering. In YTDFY22 (April-July 2021), production is up 10% versus FY2020 levels led by Odisha. Moreover, with more 10 mines lined up for auction, we anticipate provide to boost additional. Currently, NMDC rates are at 25% discount to import versus the previous two-year typical at 35%. With boost in provide, we anticipate domestic iron ore price tag discount to boost additional and domestic rates to right additional.
NMDC – down-trending iron ore rates and earnings downgrades to maintain stock beneath stress: NMDC has reported sales of 15 mn tons (+46% yoy) in April-August 2021 and is on track to reach 39 mn tons (+17% yoy) in FY2022E. However, we see NMDC struggling for volume development from FY2023E, equivalent to the preceding decade, as main steel producers obtain captive mines. On rates, we see additional downside from existing levels led by weaker seaborne rates and widening domestic discount with ramp-up in domestic provide. We forecast NMDC’s fines realization at Rs 4,500/3,030/ton versus spot at Rs 5,160/ton in FY2022/23E. Our EBITDA estimate is 5%/29% decrease than consensus for FY2022/23E. We preserve our Fair Value of Rs 155 on September 2023E at 5X EV/EBITDA.