With Attractive Valuation And Supportive Fundamentals, Motilal Oswal Retains BUY On This PSU Stock

Motilal Oswal has placed a "buy" on NMDC Limited's Stock with an estimated target price of Rs 138 per share. It sees a 24% potential upside in the share price, considering the given target price. NMDC is a PSU Navratna company under the ownership of the Ministry of Steel, Government of India. It is a mid cap metal sector company with a market capitalisation of Rs 32,690.91 crore. Below are the key takeaways from the report:

Stock Overview – Current Market Price, 52-week high/low, & returns

The last traded share price of NMDC is Rs 111.55 per share on NSE, 4.581% down from its previous close of Rs 116.90 per share. The stock has fallen 9.71% in the past 1 week, 5.75% in the past 1 month, and 12.78% in the past 3 months, respectively. The stock has further fallen 17.34% in the past 1 year, 9.79% in the past 3 years, and 17.49% in the past 5 years, respectively. It recorded its 52 week low at Rs 175.35 on 11 April 2022 and 52 week low at Rs 92.25 on 27 October 2022, respectively.

Focus on finishing real estate projects in China to boost steel, ore demand

The Chinese government appears to be focusing on reopening the economy now after three long years of following a strict zero covid strategy (ZCS), which has led to significant reduction in GDP growth rate. China has taken several measures to open its economy in the recent times. These include reducing quarantine period for incoming visitors, doing away with negative virus tests and health code checks to travel domestically not required anymore. The government has in fact stopped reporting cases on a daily basis, indicating its firm resolve to open the economy irrespective of the consequences. "We believe these measures are taken to boost the GDP growth in China which in turn should lead to higher steel production and consequently demand for iron ore and pellets. We believe NMDC will be a beneficiary from rising demand for iron ore globally as the company would increase its production of iron ore and maintain margins, which are sufficient to propel its valuations further, given that it does not have the baggage of steel plant anymore," the brokerage has said.

Iron ore prices set to rise further

NMDC has rolled back the INR 300 price reduction taken in mid-Nov'22, primarily due to withdrawal of export duty on iron ore, pellet, and steel by the government. Although NMDC does not export anything, the withdrawal has opened up opportunities for the company. With recent increase in exports in both iron ore and pellet and robust OMC auctions, we expect NMDC to announce further hike in iron ore prices

No more steel plant capex hangover; expect strong dividend

NMDC has formally de-merged its balance sheet and the process of listing of the steel plant is on. We believe the government is likely to dis-invest its shareholding in the NMDC steel plant. Any additional capex now on the steel plant will be through the balance sheet of the steel plant without recourse to the mining business. NMDC does not have a very large capex pipeline for the mining business, hence, we expect a strong dividend.

Valuation remains attractive, fundamentals supportive; retain BUY

The stock is trading at 4x our FY24 EV/EBTIDA. With no more capex-intensive programs, the company is likely to generate a strong cash flow despite us factoring a lower iron ore price regime. "With China re-opening and rushing to finish real estate projects, we expect demand for iron ore to remain strong in the near term. In addition, we expect with winter in China, focus shall again be on importing more pellets from India which should drive demand for iron ore in India. The government waiving off pellet export duty is an added advantage. We expect NMDC to continue with volume CAGR of 11.5% from FY21-25 on the back of higher volumes in both Chhattisgarh and Karnataka," Motilal Oswal said.

It added, " We expect NMDC to clock a record 51mt in FY25. We build a DPS of INR 12 for FY24 and INR 10 for FY25, implying a payout of 59- 61% and an attractive dividend yield of 9.5%/7.9% for FY24/25, respectively."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.