Buy NMDC, target Rs 151: Edelweiss Financial Services

Edelweiss Financial Services has a buy call on NMDC with a target price of Rs 151.

The current market price of NMDC is Rs 94.05.

Time period given by the brokerage is one year when NMDC price can reach the defined target.


Investment rationale by the brokerage:
Volume perks up finally in October: After lacklustre volumes in H1FY19, NMDC’s October dispatches jumped 44 per cent YoY (34 per cent QoQ) to 3.2mt led by the Chhattisgarh segment—volume growth of 32 per cent YoY (48 per cent QoQ) to 2.1mt. The company supplied 355 rakes of iron ore in October from Chhattisgarh compared to 241 in September. Its total exports were at 39 rakes in October compared to mere 10 in September. We expect exports volume to pick up further in ensuing months. In the Karnataka segment, YDTFY19 sales volume at Donimalai and Kumaraswamy are estimated at 2.82mt and 2.01mt, respectively. We expect volume growth to be constrained hereon due to the production halt at Donimalai mine over the issue of additional rental demanded by the Karnataka government as a pre-condition for extending the mining lease.

Donimalai overhang to constrain stock performance: We perceive production halt at Donimalai as a major overhang. While the company is trying to sort the issue via mutual consultation, we believe the process is likely to take time. We estimate sales volume to be impacted by about 5mt if the production does not resume for rest of FY19.

Outlook and valuations: Donimalai issue persists; maintain ‘BUY’: While we are upbeat on visible volume uptick at NMDC, we remain cautious on the Donimalai issue as it is likely to keep stock performance muted. We await more clarity on the matter. We maintain ‘BUY/SO’ with a target price of Rs 151. The stock is currently trading at an inexpensive 3.5x FY20E EBITDA.