Recommendation from Mining & Minerals Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

NMDC: GROWING WITH AN ‘IRON’ HAND

HERE IS WHY
✓Largest iron ore producer in India
✓High returns on capital employed
✓High dividend payouts

NMDC Ltd. engages in the exploration of minerals. It operates through the following segments: iron ore, pellets, other minerals and reconciliation items. NMDC is under the administrative control of the Ministry of Steel, Government of India. The company is India’s single largest iron ore producer. Since 2008 the company has been categorised by the Department of Public Enterprises as ‘Navratna’ public sector enterprise. NMDC also operates a diamond mine, Diamond Mining Project at Panna in Madhya Pradesh, which is the only mechanised diamond mine in Asia, with yearly production of around 38,149 carats as of FY 2019. It also has a sponge iron unit of 200 TPD at Paloncha in Telangana.

The company recorded net sales of Rs15,370.06 crore in FY21, a 31.38 per cent increase YoY. PBIDT was recorded at Rs8,789.27 crore, higher by 46.44 per cent. PAT increased significantly by 73.47 per cent when compared to the previous fiscal to reach Rs6,247.47 crore.A strong cash balance was witnessed with a growth of nearly 241 per cent as can be seen in the cash flows from operating activities increasing from Rs2,125.97 crore in FY20 to Rs7,266.11 crore in FY21. In Q2FY22, revenue grew by 204.66 per cent YoY to Rs6,793.51 crore from Rs2,229.89 crore in Q2FY21. However, on a sequential basis the top-line grew by 4.3 per cent.

PBIDT except for other income was reported at Rs3,112.51 crore, up by 202.53 per cent as compared to the year-ago period and the corresponding margin was reported at 45.82 per cent, contract-ing by 32 basis points YoY. On a QoQ basis, the EBITDA declined by 25.5 per cent. PAT was reported at Rs2,338.81 crore, up by 202.54 per cent from Rs773.07 crore in the same quarter for the previous fiscal year. The quarterly results have been resilient because generally the monsoon has a negative impact on the production front. But still the company managed to achieve higher production relative to Q1.

The company has delivered excellent returns for stakeholders. The ROE stood at 21.71 per cent while the ROCE was even better at 29.65 per cent. The stock is trading at a price to earnings multiple of just 3.76 versus industry PE of 6.46. It has a debt-to-equity ratio of 0.07. NMDC’s operational performance is expected to remain strong over the next two years with the potential to ramp up in iron production given the recent resumption of production from the Donimalai mine and above historical average domestic high iron ore prices. Potential value unlocking from demerg-er and strategic sale of its steel plant is a key near-term catalyst.

The company has a history of paying huge dividends. The dividend yield was recorded at 5.75 per cent. NMDC’s dividend payout could improve consid-erably as the strategic sale of the steel plant would improve its cash position while the core iron ore mining business is expected to generate steady EBITDA. Valuation of the core iron ore business is attractive given a steep discount to global mining peers. NMDC has made a comprehensive plan to enhance iron ore production capacity to 67 MTPA to meet the growing requirements of iron ore of the Indian steel sector. By virtue of all these factors, we recommend our reader-investors to BUY the scrip