Stronger-than-expected performance on higher realizations
* Revenue came in better than expected at Rs28bn (+65% yoy/-1% qoq) on the back of both, higher volume and better realization. Sales volume stood at 9.21mt (+19% yoy/-6% qoq) while realization increased 40% yoy to Rs3,068/tn (+6% qoq).
* EBITDA rose by 83% yoy (60% qoq) to Rs14.95bn. Consequently, EBITDA/tonne improved by 55% yoy (71% qoq) to Rs1,628/tonne (vs estimate of Rs1,292/tonne). EBITDA margin stood at 53% vs 32% in Q4FY17 and 47% in Q1FY17.
* APAT rose by 36% yoy (3x qoq) to Rs9.7bn. Other income declined by 63% yoy to Rs1.3bn (-1.4% qoq). No exceptional gain/loss was booked in Q1FY18 (vs exceptional loss of Rs2bn in Q4FY17).
* While we have kept our volume assumptions unchanged, we have revised our realization assumptions upwards based on the recent improvement in global pricing outlook. Upgrade to HOLD with a revised TP of Rs119.
Higher realization drives strong operating performance
Operational performance in Q1FY18 have been better than our expectation on account of higher realization. In case of iron ore, the average blended realization stood at Rs3,068/ tonne, up 40% yoy (6% qoq). We understand this is due to the lag impact of price hikes taken earlier and differential pricing in Karnataka and Chhattisgarh. Volume stood at 9.184mt, up 18% yoy (down 6% qoq). Drop in volume on a qoq basis was due to seasonality, but this has been best ever run-rate in Q1. Exports volume declined by 1% yoy but rose by 9% qoq. Better export prices compared to domestic prices had a positive impact on realization. Domestic sales stood at 8.45mt, up 20% yoy but down 7% qoq. EBITDA/tonne surged by 55% yoy (71% qoq) to Rs1,628 backed by better volume and realization. Iron ore segment EBIT rose by 80% yoy (34% qoq) to Rs15.6bn. Sequential drop in volume was more than compensated by better realization. Despite higher exports qoq, selling expenditure on a per tonne basis was down by 18% yoy. Also, employee costs and other expenditures declined by 42% each on a per tonne basis qoq, helping the company to record a much better EBITDA performance.
We maintain our sales volume estimates at 37mt and 39mt for FY18 and FY19, respectively, as we continue to believe that it will be difficult for NMDC to achieve significantly higher volume with the existing infrastructure. Pricing outlook seems little better based on the recent improvement in the global pricing scenario. But, domestic prices are likely to underperform on a relative basis due to higher supply. Capex on the steel plant and its fate would remain an overhang for the company.
Higher assumptions on realisations result in upgrade to HOLD
We have revised our realizations assumptions on the higher side based on the current trend. The company has kept it prices unchanged for August’17 after cutting by Rs200/tonne in July’17. We continue to value NMDC at 5.5x FY19 EV/EBITDA to arrive at a revised TP of Rs119. Upgrade to HOLD. Any clarity on higher volume would be positive.
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