FPO Note | Mining

December 11, 2012

NMDC
Attractively valued
Incorporated in November 1958, government-owned NMDC is Indias largest iron ore producer with a capacity of 32mn tonne. The company operates highgrade iron ore mines in Chhattisgarh and Karnataka. As of March 31, 2011, its estimated reserves and resources stood at 1,434m tonnes.

SUBSCRIBE
Issue Open: December 12, 2012 Issue Close: December 12, 2012
Issue Details
Face Value: `1 Present Eq. Paid-up Capital: `396cr Offer Size: 39.6cr Shares Post Eq. Paid-up Capital: `396cr Issue size (amount):* `5,749-5,947cr Price Band: `145-150 Post-issue implied mkt cap: `61,354cr Promoters holding Pre-Issue: 90.0% Promoters holding Post-Issue: 80.0%
Note:*At the lower and upper price band, respectively

Iron ore capacity to expand: NMDC aims to ramp up its production capacity to
48mn tonne by FY2015E (current capacity 32mn tonne) through increased exploration of its existing mines and development of new mines, ie, Bailadila 11/B, Kumaraswamy and Deposit 10 & 11/A. However, given its past track record, we forecast iron ore production capacity to increase to 40mn tonne by FY2015 (compared to its target of 48mn tonne).

Low cost producer of iron ore: NMDC is one of the lowest cost producers of iron
ore on account of its highly mechanized mines, high-grade iron ore mines and logistical efficiencies. Further, NMDC (unlike other PSUs such as SAIL and Coal India) does not face issues of overstaffing.

Post Issue Shareholding Pattern

Promoters Group MF/Banks/Indian FIs/FIIs/Public & Others 80.0

Seeking to diversify into steel making: NMDC intends to diversify its

operations by moving downstream through establishing steel plants and pellet plants. Accordingly, the company aims to build an integrated 3mn tonne steel plant in Jagdalpur, Chhattisgarh with a capex of `15,525cr.

20.0

Outlook and valuation: Over the past five years, NMDC has traded at an average EV/EBITDA of 11.1x, compared to its upper band price valuation of 3.6x FY2014E EV/EBITDA. A strong balance sheet, presence in sellers market (iron ore), low cost of production, high-grade mines and long mine life make NMDC an attractive bet in our view. Valuing the stock at 5.5x FY2014E EV/EBITDA, we derive a fair price of `198 and recommend investors to Subscribe to the issue at the upper price band of `150.
Key financials (Standalone)
Y/E March (` cr) Net sales % chg Net profit % chg FDEPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011 11,369 82.2 6,499 88.3 16.4 76.1 9.2 3.1 38.8 50.6 3.7 4.9

FY2012 11,261 (1.0) 7,266 11.8 18.3 79.3 8.2 2.4 33.3 40.1 3.5 4.4

FY2013E 11,209 (0.5) 7,343 1.1 18.5 78.4 8.1 2.0 27.0 31.7 3.4 4.3

FY2014E 12,525 11.7 8,160 11.1 20.6 78.3 7.3 1.6 24.6 29.1 2.8 3.6

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 [email protected]

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 [email protected]

Please refer to important disclosures at the end of this report

NMDC | FPO Note

Company background
Incorporated in November 1958, government-owned NMDC is Indias largest iron ore producer with a capacity of 32mn tonne. The company operates high-grade iron ore mines at Kirandul and Bacheli in Chhattisgarh and Donimalai in Karnataka. As of March 31, 2011, its estimated reserves and resources stood at 1,434m tonnes with majority of its ore over 64% Fe grade.

Issue details
The FPO comprises an offer for sale of 39.6cr equity shares of face value `1 each. There is no fresh issue of equity. NMDC has fixed the issue price band at `145150 per share.

Exhibit 1: Shareholding Pattern

Particulars Promoter and promoter group Total public holding Total
Source: Source: RHP, Angel Research

Pre-Issue No. of shares 3,56,84,18,180 3,61,53,993 3,96,47,16,000 (%) 90.0 10.0 100

Post-Issue No. of shares 3,17,19,46,580 79,27,69,420 3,96,47,16,000 (%) 80.0 20.0 100

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NMDC | FPO Note

Investment arguments
Iron ore capacity to expand
NMDC aims to ramp up its production capacity to 48mn tonne by FY2015E (current capacity 32mn tonne) through increased exploration of its existing mines and development of new mines, ie, Bailadila 11/B, Kumaraswamy and Deposit 10 & 11/A. However, given its past track record, we forecast iron ore production capacity to increase to 40mn tonne by FY2015 (compared to NMDCs target of 48mn tonne). In the near term, although we expect sales volumes to remain flat in FY2013, we expect it to grow by 13.0% yoy during FY2014.

Exhibit 2: Iron ore capacity expansion details

60 50
(mn tonnes)

7 7 32

48

40 30 20 10 0 Current

Bailadila 11/B Kumaraswamy Dep. 10, 11/A

Total

Source: Company, Angel Research

Low cost producer of iron ore

NMDC is one of the lowest cost producers of iron ore on account of its highly mechanized mines, high-grade iron ore mines and logistical efficiencies. Further, NMDC (unlike other PSUs such as SAIL and Coal India) does not face issues of high employees costs as a percentage of net sales. Its staff costs/ net sales ratio is the lowest compared to other PSUs.

Exhibit 3: NMDCs opex & EBITDA per tonne trend

70 60 50 66 63

Exhibit 4: Employee costs as a percentage of sales

45.0 40.0 35.0 30.0 37.3 37.7 40.5

(US$/tonne)

(%)

40 30 20 10 0 11

36

25.0 20.0 18.0 13.6 6.7 4.3 4.7 17.4 15.0 10.0 5.0 -

14

16

FY2010 Opex/tonne

FY2011 EBITDA/tonne

FY2012

FY2010 NMDC

FY2011 SAIL Coal India

FY2012

Source: Company, Angel Research

Source: Company, Angel Research

December 11, 2012

NMDC | FPO Note

Seeking to diversify into steel making

The management intends to diversify its operations by moving downstream through establishing steel plants and pellet plants. Accordingly, the company aims to build an integrated 3mn tonne steel plant in Jagdalpur, Chhattisgarh. The land acquisition for the same is nearly complete, which gives comfort as land acquisition has been a major bottleneck to greenfield projects in recent times. Also, NMDC plans to set up another 3mn tonne steel plant in Karnataka in partnership with the Russian steel giant, Severstal.

Exhibit 5: Chhattisgarh steel project status

Capacity Capex Land Date of completion 3mn tonne per year `15,525cr Total land required: 1,934 acres. Total land acquired: 1,932 acres. Balance land is under allotment process. 42 months from Zero date i.e., receipt of all statutory clearance/approvals and placement of orders. Targeted period FY2015

Source: Company, Angel Research

Outlook and valuation

Over the past five years, NMDC has traded at an average EV/EBITDA of 11.1x (mainly due to low liquidity), compared to its upper band price valuation of 3.6x FY2014E EV/EBITDA. Strong balance sheet, presence in sellers market (iron ore), low cost of production, high-grade mines and long mine life make NMDC an attractive bet in our view. Valuing the stock at 5.5x FY2014E EV/EBITDA, we derive a fair price of `198 and recommend investors to Subscribe to the issue at the upper price band of `150.

Key concerns
Disturbances due to Maoists activities in Bailadila
In the past, NMDC has faced Maoists attacks in Bailadila region. Such attacks have affected production and movement of iron ore from Bailadila region.

Delays in setting up the steel plant

NMDC is planning to set up steel plants in Chhattisgarh and Karnataka. However, it does not have experience in setting up steel projects. As such, there could be potential delays/ cost overruns in its steel projects.

December 11, 2012

NMDC | FPO Note

Profit & loss statement (Standalone)

Y/E March (` cr) Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortization EBIT % chg (% of Net Sales) Interest & other Charges Other Income Recurring PBT % chg Extraordinary Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 FY2010 FY2011 7,564 7,564 32.4 1,726 86 421 1,219 5,838 34.6 77.2 74 5,764 34.8 76.2 884 6,648 34.4 6,648 2,276 34.2 4,372 4,372 34.5 57.8 11.0 11.0 34.5 6,239 6,239 (17.5) 1,817 211 420 1,186 4,422 (24.2) 70.9 73 4,349 (24.6) 69.7 862 5,211 (21.6) 5,211 1,760 33.8 3,451 3,451 (21.1) 55.3 8.7 8.7 (21.1) 11,369 11,369 82.2 2,722 123 492 2,107 8,646 95.5 76.1 125 8,521 95.9 75.0 1,206 9,727 86.7 9,727 3,228 33.2 6,499 6,499 88.3 57.2 16.4 16.4 88.3 FY2012 FY2013E FY2014E 11,261 11,261 (1.0) 2,336 234 529 1,573 8,925 3.2 79.3 130 8,794 3.2 78.1 2,016 10,811 11.1 (513) 10,760 3,494 32.5 7,266 7,266 11.8 64.5 18.3 18.3 11.8 11,209 11,209 (0.5) 2,424 278 548 1,598 8,785 (1.6) 78.4 123 8,662 (1.5) 77.3 2,298 10,960 1.4 10,960 3,617 33.0 7,343 7,343 1.1 65.5 18.5 18.5 1.1 12,525 12,525 11.7 2,713 344 570 1,800 9,812 11.7 78.3 138 9,674 11.7 77.2 2,505 12,179 11.1 12,179 4,019 33.0 8,160 8,160 11.1 65.1 20.6 20.6 11.1

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NMDC | FPO Note

Balance sheet (Standalone)

Y/E March SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Other Long term Liabilities Long Term Provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long Term Loans and Advances Other non- current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,669 923 747 248 72 11,771 9,740 403 1,628 1,165 10,606 22 11,695 1,771 984 787 561 76 14,264 12,855 683 726 1,348 12,916 17 14,357 2,273 (1,174) 1,099 568 136 199 11 19,086 17,228 557 1,300 1,744 17,342 19,354 2,388 (1,199) 1,189 1,494 248 512 7 23,199 20,265 1,048 1,886 2,105 21,094 24,543 3,388 (1,323) 2,066 4,894 248 512 7 24,387 21,483 1,048 1,856 1,945 22,442 30,168 3,888 (1,460) 2,428 7,894 248 512 7 27,325 24,321 1,048 1,956 1,995 25,330 36,418 396 11,240 11,637 58 11,695 396 13,876 14,272 85 14,357 396 18,818 19,215 103 22 15 19,354 396 24,010 24,406 100 23 13 24,543 396 29,635 30,031 100 23 13 30,168 396 35,885 36,281 100 23 13 36,418 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

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NMDC | FPO Note

Cash flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Others Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 FY2010 FY2011 6,648 74 (785) (866) (2,292) 2,778 (389) 880 491 (728) (728) 2,541 7,199 9,740 5,207 73 926 (832) (1,770) 3,604 (422) 828 407 (895) (895) 3,115 9,740 12,855 9,726 122 (525) (1,144) (3,318) 4,862 (456) (3,961) (4,417) (994) (994) (550) 1,648 1,153 FY2012 FY2013E FY2014E 10,760 184 (889) (1,962) (3,502) 4,595 (1,211) 472 (739) (1,911) (0.1) (1,911) 1,945 1,153 3,098 10,960 123 (129) (3,617) 7,337 (4,400) (4,400) (1,718) (1,718) 1,219 3,098 21,483 12,179 138 (50) (4,019) 8,247 (3,500) (3,500) (1,909) (1,909) 2,838 21,483 24,321

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NMDC | FPO Note

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) (0.8) (1.7) (0.9) (2.9) (0.9) (2.0) (0.8) (2.3) (0.7) (2.5) (0.7) (2.5) 4.9 64 50 81 33 3.6 60 25 105 34 5.6 56 16 54 11 4.8 72 24 63 21 3.9 65 24 63 25 3.4 60 24 63 22 57.7 454.4 43.9 33.4 347.9 26.6 50.6 744.9 38.8 40.1 444.2 33.3 31.7 284.9 27.0 29.1 258.0 24.6 76.2 65.8 5.2 261.7 69.7 66.2 3.8 174.0 75.0 66.8 6.7 333.3 78.1 67.7 3.7 197.7 77.3 67.0 1.8 93.1 77.2 67.0 1.2 63.9 11.0 11.0 11.2 2.2 29.4 8.7 8.7 8.9 1.7 36.0 16.4 16.4 16.7 2.2 48.5 18.3 18.3 18.7 3.2 61.6 18.5 18.5 18.8 3.7 75.7 20.6 20.6 20.9 4.1 91.5 13.6 13.4 5.1 1.5 6.6 8.5 4.2 17.2 16.9 4.2 1.2 7.5 10.5 3.2 9.2 9.0 3.1 1.4 3.7 4.9 2.2 8.2 8.0 2.4 2.1 3.5 4.4 1.6 8.1 8.0 2.0 2.5 3.4 4.3 1.3 7.3 7.2 1.6 2.7 2.8 3.6 1.0 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

December 11, 2012

NMDC | FPO Note

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

NMDC No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

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NMDC | FPO Note

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