J.P. Morgan remains overweight on NMDC with a revised Dec-21 price target of Rs 150 (earlier Sept-21 target was Rs 126). While J.P. Morgan increased their estimates by 42% for FY21, FY22 estimates implies a 40% decline from Q3 annualized levels, and hence if domestic iron ore price decline is muted, there is upside risk to estimates. NMDC share price closed at Rs 117.75 up Rs 1.65 or 1.4% on Monday.

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NMDC Earnings highlights:

NMDC reported Q3 FY21 EBITDA of Rs 27.8 bn (+169% q/q) v/s consensus at Rs24bn and PAT at Rs 21.1 bn (+172% q/q) v/s consensus at Rs 17.5 bn. Implied ASP/t was up Rs 1300/t q/q (+37%). NMDC increased prices by Rs 2550/t over July through January, and cut prices by Rs 600/t in February. Against this NMDC's implied ASP/t over the last two quarters was up Rs1550/t and hence the full benefit of price hikes would flow through in Q4.

Domestic iron ore prices should decline from here, but by how much would depend on the auctioned Odisha iron ore mines which have not ramped up so far:

India’s domestic iron ore prices went up by 150-200% between May 2020 and Jan 2021, as the Odisha auctioned mines could not ramp up production quickly enough. While NDMC did hike prices multiple times over the last three months, the company’s prices did lag the spot prices of the merchant miners. Iron ore production has started to increase, and domestic iron ore prices have started to fall.

While the Government is trying to incentivize all the auctioned mines to restart production, in our view some of them are unlikely to ramp up, simply given the economics of the bids made when they won the mines in the auction. Hence while domestic iron ore prices are likely to fall, we do NOT see them going back to the levels seen in May 2020. Hence while NMDC should cut domestic prices, J.P. Morgan overall still see earnings upside risks to consensus.

Next catalysts for NDMC include:

a) Steel plant separation
b) visibility on volume growth: In our view iron ore prices are unlikely to be the catalyst for continued stock price outperformance.

In J.P. Morgan view the next two set of catalysts are:

a) steel plant separation, which while being talked about has not yet happened
b) volume growth visibility.

The Donimalai mine has not yet ramped up and uncertainty remains on the mine restart. NMDC’s Q3 release has no clarity on when production would restart from Donimalai While January production at 3.86MT annualizes to 46MT, at this point there is no visibility on the sustainable volume trend at NMDC and we maintain our FY22 iron ore prod forecast at 33MT, and if NMDC is able to sustain January prod levels, there would be upside risk to J.P. Morgan’s estimates.