NMDC a strong re-rating candidate; offers a potential upside of 19%: Kotak Institutional

Following the steel plant demerger, Kotak Institutional Equities is now bullish on PSU mining major NMDC and has upgraded its rating on the counter to a buy with a target price of Rs 130. The suggested target implies a potential upside of 19% from the current levels.

"We see a strong re-rate case for NMDC after the steel plant demerger with improved capital allocation, higher free cash flow (FCF), and a likely higher dividend payout," said the brokerage.

The company, to push volumes in the second half of the financial year 2023, has cut iron ore prices sharply, the brokerage noted. The report said the company has been facing a dent in sales with a decline of 12% year-on-year YTD due to poor offtake from steel producers.

NMDC has cut iron ore prices by 46% YTD, led by an increase in export duty in May 2022 and a fall in seaborne prices. The brokerage believes that iron ore prices both in domestic and seaborne markets have upside risks in 2HFY23 on the back of a recovery in domestic demand, allowing miners to raise prices, cost support as well as recovery in Chinese steel demand as well as potential rollback of increase in export duty to 50% (from 30%).

"We are building 22% higher realization versus spot in FY2024E assuming no cut in export tax in the base case," the brokerage said.

The brokerage has cut the EBITDA estimate by 9%/6% for FY2023/24E, factoring in the recent price cut. Further, its fair value is unchanged at Rs 130/share at 5.5X EV/EBITDA September 2024E as lower earnings get offset by lower capex assumptions. The brokerage upgrades its recommendation to buy from add, given an attractive 20% upside after the recent correction.

In the last one year, the stock has underperformed with a negative return of 19%.

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