3QFY2012 Result Update | Mining

February 2, 2011

NMDC
Performance Highlights

BUY
CMP Target Price
2QFY12 3,062 2,435 79.5 1,963 % chg (qoq) (7.8) (7.2) 59bp (5.3)

`185 `227
12 months

Particulars (` cr) Net sales EBITDA % margin PAT

3QFY12 2,822 2,261 80.1 1,859

2QFY11 % chg (yoy) 2,622 2,017 76.9 1,519 7.6 12.1 320bp 22.4

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Mining 73,169 0.8 305/136 60921 1 17,432 5,270 NMDC.BO NMDC@IN

Source: Company, Angel Research

For 3QFY2012, NMDCs profitability came in ahead of our estimates on account of higher than expected realizations. We maintain Buy rating on the stock. Realization up 7.6% yoy and 9.0% qoq: NMDCs net sales increased by 7.6% yoy to `2,822cr (slightly above our estimate of `2,745). Blended realization surprised us positively (+6.1% yoy and +9.0% qoq to 4,394/tonne). However, iron ore sales volumes were below our estimate (grew by only 1.4% yoy to 6.4mn tonnes). Iron ore sales volumes were affected due to breakdown of slurry pipeline in Bailadila mines and lower availability of railway rakes. EBITDA/tonne increased by 10.5% yoy: During the quarter, EBITDA increased by 12.1% yoy to `2,261cr, in-line with the increase in sales. EBITDA/tonne increased by 10.5% yoy and 9.9% qoq to `3,532 due to higher average realization. Other income rose by 78.3% yoy to `525cr. Hence, PAT grew by 22.4% yoy to `1,859cr (above our estimate of `1,757). Outlook and valuation: Over the past five years, NMDC has traded at an average EV/EBITDA of 13.7x, compared to its current valuation of 4.4x FY2013E EV/EBITDA. Strong balance sheet, presence in sellers market (iron ore), relative immunity to iron ore price declines, low cost of production, high-grade mines, long mine life and compelling valuations make NMDC an attractive bet at these levels. Valuing the stock at 6.0x FY2013E EV/EBITDA, we derive a fair price of `227 and maintain our Buy rating on the stock. Key financials
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

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 90.0 8.4 0.8 0.9

Abs. (%) Sensex NMDC

3m

1yr

3yr 92.3 11.6

(2.7) (11.6) (20.5) (30.5)

FY2010 6,239 (17.5) 3,451 (21.1) 8.7 70.9 21.2 5.1 26.6 33.4 9.7 13.6

FY2011 11,369 82.2 6,499 88.3 16.4 76.1 11.3 3.8 38.8 50.6 4.9 6.5

FY2012E 11,732 3.2 7,497 15.3 18.9 79.4 9.8 2.9 33.9 41.4 4.3 5.5

FY2013E 13,163 12.2 8,380 11.8 21.1 78.9 8.7 2.3 29.8 36.2 3.5 4.4

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

NMDC | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 performance

Y/E March (` cr) Net Sales Raw Material % of net sales Consumption of stores & spares % of net sales Staff Cost % of net sales Other Expenditure % of net sales Total Expenditure % of net sales Operating Profit OPM% Other Operating Income EBITDA EBITDA margin (%) Interest Depreciation Other Income Exceptional Items Profit before Tax % of net sales Tax % of PBT PAT
Source: Company, Angel Research

3QFY12 2,822 (33) (1.2) 60 2.1 139 4.9 396 14.0 561 19.9 2,261 80.1 2,261 80.1 34 525 2,752 97.5 893 32.4 1,859

3QFY11 2,622 (28) (1.1) 51 1.9 109 4.2 473 18.1 605 23.1 2,017 76.9 2,017 76.9 29 295 2,282 87.0 763 33.4 1,519

yoy % 7.6 18.4 16.8 27.3 (16.3) (7.3) 12.1

2QFY12 3,062 63 2.1 52 1.7 134 4.4 377 12.3 627 20.5 2,435 79.5 -

qoq % (7.8) (152.9) 14.3 3.3 5.0 (10.5) (7.2)

12.1

2,435 79.5 -

(7.2)

17.3 78.3 20.6 17.0 22.4

32 503 2,906 94.9 943 32.4 1,963

6.4 4.5 (5.3) (5.3) (5.3)

Exhibit 2: 3QFY2012 Actual vs. Angel estimates

(` cr) Net sales EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 2,822 2,261 80.1 1,859

Estimates 2,745 2,127 77.5 1,757

Variation (%) 2.8 6.3 261bp 5.8

February 2, 2011

NMDC | 3QFY2012 Result Update

Result highlights
Realization rises 6.1% yoy and 9.0% qoq
NMDCs net sales increased by 7.6% yoy to `2,822cr (slightly above our estimate of `2,745). Blended realization surprised us positively (+6.1% yoy and +9.0% qoq to 4,394/tonne). However, iron ore sales volumes were below our estimate (grew by only 1.4% yoy to 6.4mn tonnes). Iron ore sales volumes were affected due to breakdown of slurry pipeline in Bailadila mines and lower availability of railway rakes.

Exhibit 3: Sales volumes up 1.4% yoy

9 8 7 6 5 4 3 2 1 0 3QFY10 1QFY11 3QFY11 1QFY12 % yoy (RHS) 3QFY12 Sales volume 60 50 40

Exhibit 4: Realization increased by 6.1% yoy

5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3QFY10 1QFY11 3QFY11 Average revenue 1QFY12 3QFY12 % yoy (RHS) 120 100 80 60

(mn tonnes)

(`/tonne)

30

(%)

10 0 -10 -20

20 0 -20 -40 -60

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 5: Net sales grew by 7.6% yoy

4,000 3,500 3,000 2,500 80 120 100

(` cr)

2,000 1,500 1,000 500 0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12
Net sales (LHS) yoy change (RHS)

60 %

40 20 0

Source: Company, Angel Research

EBITDA/tonne increased by 10.5% yoy

During the quarter, EBITDA increased by 12.1% yoy to `2,261cr, in-line with the increase in sales. EBITDA margin expanded by 320bp yoy to 80.1%. EBITDA/tonne increased by 10.5% yoy and 9.9% qoq to `3,532 due to higher average realization. Royalty and cess expenses/tonne stood flat yoy but increased 35.1% qoq to `410.

February 2, 2011

(%)

20

40

( )

NMDC | 3QFY2012 Result Update

Exhibit 6: EBITDA/tonne grew by 10.2% yoy

4,000 3,500 3,000 120.0 100.0 80.0 60.0 40.0

Exhibit 7: EBITDA margin stood at 80.1%

3,000 2,500 2,000 100.0 90.0 80.0 70.0 60.0 40.0 30.0 20.0 10.0 0.0 3QFY10 1QFY11 EBITDA (LHS) 3QFY11 1QFY12 3QFY12 EBITDA margin (RHS)

(`/tonne)

2,500 2,000 1,500 1,000 500 0 3QFY10 1QFY11 3QFY11 EBITDA/tonne 1QFY12 % yoy (RHS) 3QFY12

(` cr)

0.0 (20.0) (40.0) (60.0) (80.0)

(%)

20.0

1,000 500 0

Source: Company, Angel Research

Source: Company, Angel Research

Other income boosts PAT growth

Other income increased by 78.3% yoy to `525cr on account of higher yields as well as higher cash balances on a yoy basis. Hence, PAT grew by 22.4% yoy to `1,859cr (above our estimate of `1,757).

Exhibit 8: Net margin stood at 65.9%

2,500 70.0 60.0 50.0

2,000

(`cr)

1,500

40.0 30.0 20.0

1,000

500

10.0 0.0 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Net profit (LHS) Net profit margin (RHS)

Source: Company, Angel Research

February 2, 2011

(%)

(%)

1,500

50.0

NMDC | 3QFY2012 Result Update

Investment rationale
Targets production to 40mn tonnes by FY201415E
NMDC aims to ramp up the companys production capacity to 40mn tonnes by FY201415E through increased exploration of its existing mines and development of new mines, i.e., Deposit 11B and Deposit 13 in Bailadila and Kumaraswany, respectively, in Karnataka. We expect NMDCs sales volumes to grow at a CAGR of 10.2% during FY2011-13. Strong balance sheet could pave way for overseas acquisitions During September 2011, NMDC purchased a 50% stake in Australia-based Legacy Iron Ore (Legacy) as a cornerstone investor for `92cr. Also, the company is currently prospecting various mining assets, including an iron ore mine and a phosphate mine in Australia, an iron ore mine in Brazil and a coking coal asset in Russia. With a strong balance sheet having net cash of `20,725cr (September 30, 2011), we do not rule out the company acquiring more mining assets overseas. However, given that NMDC is a government-owned company, we do not foresee a big-ticket acquisition.

Seeking to diversify into steel making

Management intends to diversify its operations by moving downstream through establishing steel plants and pellet plants. Accordingly, on December 10, 2010, the company had signed a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 3mn tonne steel plant in Karnataka. This JV will have captive coking coal mine in Russia, while it will have an iron ore mining subsidiary in India. Over 90% of the land acquisition is complete, which gives comfort as land acquisition has been a major bottleneck to greenfield projects in recent times.

Exhibit 9: Chhattisgarh steel project status

Capacity Capex Land Date of completion 3mn tonnes per year `15,525cr Total land required: 1,934 acres. Total land acquired: 1,783 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

February 2, 2011

NMDC | 3QFY2012 Result Update

Outlook and valuation

Over the past five years, NMDC has traded at an average EV/EBITDA of 13.7x, compared to its current valuation of 4.4x FY2013 EV/EBITDA. Strong balance sheet, presence in sellers market (iron ore), relative immunity to iron ore price declines, low cost of production, high-grade mines, long mine life and compelling valuations make NMDC an attractive bet at these levels. Valuing the stock at 6.0x FY2013E EV/EBITDA, we derive a fair price of `227 and maintain our Buy rating on the stock.

Exhibit 10: Key assumptions

FY2012E Sales volume (mn tonnes) Average realization (US$/tonne)
Source: Angel Research

FY2013E
32 83

28 85

Exhibit 11: EPS Angel forecast vs. consensus

Year (`) FY2012E FY2013E
Source: Bloomberg, Angel Research

Angel forecast
18.9 21.1

Bloomberg consensus
19.8 19.1

Variation (%)
(4.5) 10.7

Exhibit 12: EV/EBITDA band

250,000 200,000 150,000 100,000 50,000 0 May-06

(`cr)

Apr-07 5x

Mar-08 8x

Feb-09 11x

Jan-10 17x

Dec-10 14x

Nov-11

Source: Bloomberg, Angel Research

February 2, 2011

NMDC | 3QFY2012 Result Update

Exhibit 13: P/E band

600 500 400

(`)

300 200 100 0 May-06

Apr-07 9x

Mar-08 14x

Feb-09 19x

Jan-10 24x

Dec-10

Nov-11

Source: Bloomberg, Angel Research

Exhibit 14: P/BV band

700 600 500

(`)

400 300 200 100 0 Apr-06 Mar-07 2.0x Feb-08 4.0x Jan-09 Dec-09 6.0x Nov-10 8.0x Oct-11

Source: Bloomberg, Angel Research

Exhibit 15: Recommendation summary

Companies CMP Sesa Goa NMDC Coal India MOIL Target Reco. Mcap Upside (` cr) (%) P/E (x) FY12E FY13E P/BV (x) FY12E FY13E EV/EBITDA (x) FY12E 2.7 FY13E 2.4 RoE (%) FY12E 22.3 FY13E 22.5 RoCE (%) FY12E 21.2 FY13E 13.3 (`) price (`)

232 185 322 271

- Neutral 227 Buy

20,185 73,169 4,551

23 -

6.5 9.8 13.7 10.2

5.2 8.7 13.1 9.4

1.3 2.9 4.5 1.8

1.1 2.3 3.6 1.6

5.5 8.8 4.7

4.4 8.0 3.9

33.9 37.8 19.4

29.8 30.5 18.4

41.4 35.2 21.1

36.2 28.0 19.7

- Neutral 203,261 - Neutral

Source: Company, Angel Research

February 2, 2011

NMDC | 3QFY2012 Result Update

Profit & loss statement

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& Amortisation 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 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 5,711 5,711 36.4 1,374 145 356 874 4,337 34.5 75.9 60 4,277 36.1 74.9 671 4,947 41.4 4,947 1,696 34.3 3,251 3,251 40.1 56.9 8.2 8.2 40.1 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 11,732 11,732 3.2 2,413 265 493 1,656 9,319 7.8 79.4 136 9,183 7.8 78.3 2,006 11,189 15.0 11,189 3,692 33.0 7,497 7,497 15.3 63.9 18.9 18.9 15.3 13,163 13,163 12.2 2,775 329 553 1,893 10,388 11.5 78.9 145 10,243 11.5 77.8 2,264 12,507 11.8 12,507 4,127 33.0 8,380 8,380 11.8 63.7 21.1 21.1 11.8

February 2, 2011

NMDC | 3QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,421 853 568 112 83 8,283 7,199 244 840 775 7,508 25 8,296 1,669 923 747 248 72 11,771 9,740 403 1,628 1,165 10,606 22 11,695 1,771 984 787 556 76 14,264 12,855 519 890 1,348 12,916 22 14,357 2,273 1,174 1,099 677 136 19,172 17,228 1,043 901 1,781 17,391 14 19,317 3,273 1,310 1,963 745 136 23,937 22,025 1,043 869 1,735 22,202 14 25,060 4,273 1,454 2,818 819 136 29,480 27,451 1,043 985 1,789 27,691 14 31,479 132 8,157 8,290 6 8,296 396 11,240 11,637 58 11,695 396 13,876 14,272 85 14,357 396 18,818 19,215 103 19,317 396 24,561 24,957 103 25,060 396 30,979 31,376 103 31,479 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 2, 2011

NMDC | 3QFY2012 Result Update

Cash flow statement

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 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 4,947 60 (661) (105) (1,765) 2,476 (123) 640 517 (643) (643) 2,350 4,849 7,199 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 9,727 122 (525) (1,143) (3,319) 4,861 (517) 1,022 506 (853) (142) (994) 4,373 12,855 17,228 11,189 136 (14) (3,692) 7,619 (1,068) (1,068) (1,754) (1,754) 4,797 17,228 22,025 12,507 145 (63) (4,127) 8,462 (1,074) (1,074) (1,961) (1,961) 5,427 22,025 27,451

February 2, 2011

10

NMDC | 3QFY2012 Result Update

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) (0.9) (1.7) (0.8) (1.7) (0.9) (2.9) (0.9) (2.0) (0.9) (2.4) (0.9) (2.7) 4.2 44 31 61 23 4.9 64 50 81 33 3.6 60 25 105 34 5.6 56 16 54 11 4.2 56 16 54 16 3.5 56 16 54 15 60.6 505.3 46.1 57.7 454.4 43.9 33.4 347.9 26.6 50.6 795.9 38.8 41.4 535.3 33.9 36.2 391.9 29.8 74.9 65.7 6.0 293.1 76.2 65.8 5.2 261.7 69.7 66.2 3.8 174.0 75.0 66.8 6.7 336.9 78.3 67.0 4.8 253.6 77.8 67.0 3.9 202.1 8.2 8.2 8.4 4.9 20.9 11.0 11.0 11.2 2.2 29.4 8.7 8.7 8.9 2.0 36.0 16.4 16.4 16.7 3.2 48.5 18.9 18.9 19.3 3.8 62.9 21.1 21.1 21.5 4.2 79.1 22.5 22.1 8.8 2.7 11.5 15.2 7.9 16.7 16.5 6.3 1.2 8.4 10.9 5.4 21.2 20.8 5.1 1.1 9.7 13.6 4.2 11.3 11.0 3.8 1.7 4.9 6.5 2.9 9.8 9.6 2.9 2.0 4.3 5.5 2.0 8.7 8.6 2.3 2.3 3.5 4.4 1.4 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 2, 2011

11

NMDC | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 2, 2011

12