1QFY2012 Result Update | Mining

July 29, 2011

NMDC
Performance Highlights

REDUCE
CMP Target Price
1QFY11 % chg (yoy) 2,518 2,051 81.5 1,504 10.5 9.9 (43)bp 19.8 4QFY11 3,770 2,739 72.7 2,099 % chg (qoq) (26.2) (17.7) 837bp (14.2)

`247 `229
12 Months

Particulars (` cr) Net sales EBITDA % margin Net profit

1QFY12 2,783 2,255 81.0 1,801

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 97,750 0.7 305/227 95378 1 18,210 5,488 NMDC.BO NMDC@IN

Source: Company, Angel Research

For 1QFY2012, NMDCs top line came in below our estimates, while the bottom line was slightly above our expectations on account of lower-than-expected selling costs. For 1QFY2012, net sales, EBITDA and net profit grew by 10.5%, 9.9% and 19.8%, respectively. We maintain our Reduce rating on the stock. Realisation dips by 9.3% qoq: Sales volume for the quarter grew by 7.8% yoy to 6.9mn tonnes, below our expectations. Average blended realisation increased by 2.5% yoy and declined by 9.3% qoq to `4,033/tonne. Thus, due to higher iron ore realisation and sales volume, net sales grew by 10.5% yoy `2,783cr. EBITDA increased by 9.9% yoy to `2,255cr, while EBITDA margin declined by 43bp yoy to 81.0% despite higher royalty expenses. EBITDA/tonne increased by 2.0% yoy and 1.2% qoq to `3,268. Other income increased by 99.2% yoy to `442cr. Consequently, net profit increased by 19.8% yoy to `1,801cr in 1QFY2012. Outlook and valuation: NMDCs realisations are expected to remain under pressure as its iron ore exports (which enjoy higher realisation) are halted currently. Moreover, NMDCs volume growth remains at risk on account of Naxal activity in some of its mining areas. We have lowered our realisation estimates for FY2012 and FY2013 as the company has not renewed its exports contracts recently. The stock is currently trading at an 8.8x FY2012E and 7.2x FY2013E EV/EBITDA, which is expensive in our view. Valuing the stock at 6.5x FY2013E EV/EBITDA, we derive a target price of `229 and maintain our Reduce rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 90.0 8.4 0.7 0.8

Abs. (%) Sensex NMDC

3m (4.8) (9.6)

1yr 1.2 (5.5)

3yr 32.0 (17.5)

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

FY2010 6,239 (17.5) 3,451 (21.1) 8.7 70.9 28.3 6.8 26.6 33.4 13.6 19.2

FY2011E 11,369 82.2 6,499 88.3 16.4 76.1 15.0 5.1 38.7 50.5 7.1 9.4

FY2012E 12,197 7.3 7,044 8.4 17.8 73.9 13.9 4.0 32.2 40.3 6.5 8.8

FY2013E 14,027 15.0 8,054 14.3 20.3 73.4 12.1 3.2 29.2 36.6 5.3 7.2

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

Please refer to important disclosures at the end of this report

NMDC | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 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 Net profit
Source: Company, Angel Research

1QFY12 1QFY11 2,783 5 0.2 40 1.4 129 4.6 354 12.7 528 19.0 2,255 81.0 0 2,255 81.0 0 34 442 0 2,663 95.7 862 32.4 1,801 2,518 (23) (0.9) 45 1.8 110 4.4 335 13.3 467 18.5 2,051 81.5 0 2,051 81.5 0 24 222 0 2,249 89.3 745 33.1 1,504

yoy % 10.5 (122.3) (10.6) 17.4 5.5 13.1 9.9

FY11 11,369 (49) (0.4) 178 1.6 475 4.2 2,107 18.5 2,711 23.8 8,658 76.2 0

FY10 yoy % 6,774 (34) (0.5) 183 2.7 381 5.6 1,186 17.5 1,717 25.3 5,057 74.7 0 5,057 74.7 0 75 838 0 5,820 85.9 1,971 33.9 3,849 73.8 54.6 67.3 66.7 43.9 71.2 71.2 57.9 77.7 24.6 (2.7) 67.8 45.0

9.9

8,658 76.2 0

42.5 99.2 18.4 15.6 19.8

125 1,206 0 9,738 85.7 3,048 31.3 6,691

Exhibit 2: 1QFY2012 Actual vs. Angel estimates

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

Actual 2,783 2,255 81.0 1,801

Estimates 3,397 2,150 63.3 1,717

Variation (%) (18.1) 4.9 1,773bp 4.9

July 29, 2011

NMDC | 1QFY2012 Result Update

Result highlights
Modest top-line performance
Sales volume for the quarter grew by 7.8% yoy to 6.9mn tonnes, below our expectations. Average blended realisation increased by 2.5% yoy and declined by 9.3% qoq to `4,033/tonne. Thus, due to higher iron ore realisation and sales volume, net sales grew by 10.5% yoy `2,783cr.

Exhibit 3: Sales volumes up 7.8% yoy

9 8 7 6 5 4 3 2 1 0 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 30 20 10

Exhibit 4: Realisation increased by only 2.5% yoy

6,000 5,000 4,000 120 100 80 60 20 0 -20 -40 -60 1QFY10 3QFY10 1QFY11 Average realisation 3QFY11 1QFY12 % yoy (RHS) 40

(mn tonnes)

(10) (20) (30) (40)

(%)

2,000 1,000 0

Sales volume

% yoy (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 5: Net sales grew by 10.5% yoy

4,000 3,500 3,000 2,500 120 100 80 60

(` cr)

1,500 1,000 500 0 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Net sales (LHS) yoy change (RHS)

20 0 (20) (40)

Source: Company, Angel Research

EBITDA increases by 9.9% yoy

EBITDA increased by 9.9% yoy to `2,255cr, while EBITDA margin declined by 43bp yoy to 81.0% despite higher royalty expenses. EBITDA/tonne increased by 2.0% yoy and 1.2% qoq to `3,268. Selling expenses/tonne (including freight) decreased by 68.6% yoy and 86.9% qoq to `62 due to lower freight costs on the back of stoppage of iron ore exports. Royalty and cess expenses/tonne increased by 58.2% yoy to `344 on account of increased royalty rates.

July 29, 2011

(%)

2,000

40

(%)

(`/tonne)

3,000

NMDC | 1QFY2012 Result Update

Exhibit 6: EBITDA per tonne up 2.0% yoy

4,000 3,500 3,000 120.0 100.0 80.0 60.0 40.0 20.0 0.0 (20.0) (40.0) (60.0) (80.0) 1QFY10 3QFY10 1QFY11 3QFY11 % yoy (RHS) 1QFY12 EBITDA/tonne

Exhibit 7: EBITDA margin stood at 81.0%

3,000 2,500 2,000
(` cr)

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

( ` /tonne)

2,500 2,000 1,500 1,000 500 0

(%)

1,500 1,000 500 0

50.0

Source: Company, Angel Research

Source: Company, Angel Research

Other income boosts net profit growth

Other income increased by 99.2% yoy to `442cr. Consequently, net profit increased by 19.8% yoy to `1,801cr in 1QFY2012.

Exhibit 8: Net margin up 500bp yoy

2,500 2,000 1,500 1,000 500 0 1QFY10 3QFY10 Net profit (LHS)
Source: Company, Angel Research

70.0 60.0 50.0

(`/cr)

30.0 20.0 10.0 0.0 1QFY11 3QFY11 1QFY12 Net profit margin (RHS)

July 29, 2011

(%)

40.0

NMDC | 1QFY2012 Result Update

Investment rationale
Increased production to 50mn tonnes by FY201415E
Management aims to ramp up its production capacity to 50mn 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 in Karnataka. The targeted cost for the development of the three mines is `2,400cr. However, in FY2011, the companys volumes have been impacted by iron ore ban in Karnataka and Naxal activities in the Dantewada region of Chhattisgarh.

Seeking to diversify into steel making and acquire mines abroad

Management intends to diversify its operations by moving downstream through the establishment of steel plants and pellet plants. Accordingly, on December 10, 2010, the company announced that it has signed a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 2mn 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. In addition, management has indicated its plans to acquire mines in Australia, Brazil and South Africa.

Rise in royalty and freight rates to affect margins

Rising prices of iron ore have resulted in higher royalty costs for NMDC in FY2011. Further, railways have raised freight rates frequently, resulting in increasing freight costs for NMDC. We expect margins to decline in FY2012 on account of rising royalty and freight costs.

Outlook and valuation

NMDCs realisations are expected to remain under pressure as its iron ore exports (which enjoy higher realisations) are halted currently. Moreover, NMDCs volume growth remains at risk on account of Naxal activity in some of its mining areas. We have lowered our realisation estimates for FY2012 and FY2013 as the company has not renewed its exports contracts recently. The stock is currently trading at an 8.8x FY2012E and 7.2x FY2013E EV/EBITDA, which is expensive in our view. Valuing the stock at 6.5x FY2013E EV/EBITDA, we derive a target price of `229 and maintain our Reduce rating on the stock.

Exhibit 9: Key assumptions

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

FY2013E
35 90

30 90

July 29, 2011

NMDC | 1QFY2012 Result Update

Exhibit 10: EPS Angel forecast vs. consensus

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

Angel forecast
17.8 20.3

Bloomberg consensus
20.5 21.0

Variation (%)
(13.3) (3.3)

Exhibit 11: EV/EBITDA band

250,000 200,000 150,000 100,000 50,000 0 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 2x
Source: Bloomberg, Angel Research

(`cr)

5x

8x

11x

14x

Exhibit 12: P/E band

600 500 400
(`)

300 200 100 0 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 5x 10x 15x 20x

Source: Bloomberg, Angel Research

July 29, 2011

NMDC | 1QFY2012 Result Update

Exhibit 13: P/BV band

600 500 400
(`)

300 200 100 0 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 0.5x 1.5x 2.5x 3.5x

Source: Bloomberg, Angel Research

Exhibit 14: Recommendation summary

Companies Sesa Goa NMDC Coal India MOIL CMP (`) 290 Target price (`) 335 Buy Reco. Mcap (` cr) 25,173 Upside (%) 16 FY12E 6.1 P/E (x) FY13E 7.1 FY12E 2.0 P/BV (x) FY13E 1.6 EV/EBITDA (x) FY12E 1.6 FY13E 3.4 FY12E 40.7 RoE (%) FY13E 25.2 RoCE (%) FY12E 42.9 FY13E 30.6

247 394 351

229 -

Reduce Neutral Neutral

97,750 248,675 5,893

(7) -

13.9 18.3 10.7

12.1 17.6 10.0

4.0 5.7 2.3

3.2 4.6 2.0

8.8 12.0 5.5

7.2 10.5 4.8

32.2 35.0 23.7

29.2 28.8 21.4

40.3 33.9 27.7

36.6 29.0 24.5

Source: Company, Angel Research

July 29, 2011

NMDC | 1QFY2012 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 12,197 12,197 7.3 3,184 281 518 2,385 9,013 4.2 73.9 146 8,867 4.1 72.7 1,647 10,514 8.1 10,514 3,470 33.0 7,044 7,044 8.4 57.8 17.8 17.8 8.4 14,027 14,027 15.0 3,731 355 547 2,829 10,296 14.2 73.4 168 10,128 14.2 72.2 1,894 12,021 14.3 12,021 3,967 33.0 8,054 8,054 14.3 57.4 20.3 20.3 14.3

July 29, 2011

NMDC | 1QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Share Warrants Minority Interest 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 2,771 1,109 1,662 556 76 18,577 16,512 519 1,546 1,498 17,079 22 19,395 76 20,726 18,517 519 1,690 1,612 19,114 22 24,584 76 26,228 23,779 519 1,930 1,747 24,481 22 30,783 6,071 1,255 4,816 556 7,071 1,424 5,647 556 132 8,157 8,290 6 8,296 396 11,240 11,637 58 11,695 396 13,876 14,272 85 14,357 396 18,914 19,310 85 19,395 396 24,103 24,499 85 24,584 396 30,301 30,698 85 30,783 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

July 29, 2011

NMDC | 1QFY2012 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 FY2011E 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 9,727 125 (506) (3,228) 6,119 (1,000) (1,000) (1,461) (1,461) 3,658 12,855 16,512 (1,855) (1,855) 2,005 16,512 18,517 (1,855) (1,855) 5,262 18,517 23,779 10,514 146 (30) (3,470) 7,160 (3,300) (3,300) 12,021 168 (105) (3,967) 8,117 (1,000) (1,000)

July 29, 2011

10

NMDC | 1QFY2012 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) Leverage (x) Operating ROE 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) (1.2) (0.8) (1.5) (0.9) (1.7) (0.8) (1.7) (0.8) (2.1) (0.8) (2.3) 2.9 45.0 31.1 42.2 31.9 3.3 48 25 49 26 4.2 44 31 61 23 4.9 64 50 81 33 2.8 60 30 90 22 2.1 60 30 90 21 63.7 45.5 63.8 362.8 47.3 60.6 462.3 46.1 57.7 428.2 43.9 40.3 226.3 32.2 36.6 169.4 29.2 183.6 219.2 270.9 248.4 132.8 103.8 69.3 66.0 4.0 183.6 75.1 66.3 4.4 219.2 74.9 65.7 5.5 270.9 76.2 65.8 5.0 248.4 72.7 67.0 2.7 132.8 72.2 67.0 2.1 103.8 4.6 4.6 4.9 2.8 10.1 5.9 5.9 6.1 3.5 14.6 8.2 8.2 8.4 4.9 20.9 11.0 11.0 11.2 2.2 29.4 17.8 17.8 18.1 4.0 61.8 20.3 20.3 20.7 4.0 77.4 53.5 50.3 24.3 1.1 25.5 35.3 23.5 42.1 40.7 16.9 1.4 22.2 28.8 15.9 30.1 29.5 11.8 2.0 15.9 20.9 10.9 22.4 22.0 8.4 0.9 11.6 15.1 7.5 13.9 13.6 4.0 1.6 6.5 8.8 3.2 12.1 11.9 3.2 1.6 5.3 7.2 2.4 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

July 29, 2011

11

NMDC | 1QFY2012 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%)

July 29, 2011

12