Buy NMDC, Muthoot Finance, Motherson Sumi Systems: Prabhudas Lilladher

Prabhudas Lilladher’s research report on NMDC

NMDC underperformed steel stocks by a wide margin over last three months due to uncertainty regarding payment of premium for its Donimalai mine’s lease renewal. After two years impasse, Govt of Karnataka renewed Donimalai mines (with capacity of 7mtpa) at a premium of 22.5% of sales price. We expect that similar premium would be paid for its iron ore operations in Chhattisgarh, which constitutes 78% of its overall volumes. Severe shortage in domestic market (due to supply disruptions in Odisha), strong profitability of steel producers and firm outlook on global prices shall help NMDC to mitigate higher costs with stronger product prices.

Outlook

In light of strong price outlook and attractive valuations, we upgrade NMDC to BUY with TP of Rs125 (earlier Rs98) based on 1) EV/EBITDA of 3.7x FY22e for iron ore operations (factoring 22.5% premium on entire operations) and 2) EV/T of US$475 for 3mtpa steel plant.

Prabhudas Lilladher’s research report on Muthoot Finance

We initiate coverage on Muthoot Finance (MUTH), with a BUY rating as it is a 1) market leader (18% market share) and proxy play on gold financing market in India 2) carries robust capital (Tier I of 24%) 3) maintains low leverage(4x) and 4) comes at reasonable valuations at 2.2xPBV (FY23E). We expect MUTH to maintain market leadership in gold lending underpinned by pricing power, improved productivity and insulation from underlying collateral price fluctuations. A low risk (0.3% credit costs/ 2% NPA), high return business (RoA/RoE: 6%/22%), MUTH is expected to clock healthy growth momentum (19% CAGR) over FY22-23 defying pandemic challenges.

Outlook

We recommend BUY based on SoTP metrics assigning PBV multiple of 2.6x to core book at Rs1,330 value per share and subsidiaries at Rs34 per share arriving at price target of Rs 1,364.

Prabhudas Lilladher’s research report on Motherson Sumi Systems

MSS hosted a virtual investor meet (Link for PPT) outlining key strategies to achieve for their vision 2025 targets. These include 1) Consol revenues at USD36bn 2) 3CX10 (no country/component/customer contribute >10% in topline) 3) 25% revenue from non-auto and 4) 40% of consol profit as dividend. In its sixth five-year plan (2020-2025), MSS is aggressive in targeting ~25% revenue from non-auto verticals such as Aerospace, Health care, IT and Logistics which are likely key enablers of USD9bn revenues (both organic and inorganic). In our view, their target of USD36bn revenue by 2025 (v/s ~USD9bn in FY20) is aggressive and it will be pre-loaded by acquisitions both in auto and non-auto segment. It has hinted on several mid/large scale opportunities available in auto/non-auto space globally. While we remain constructive on MSS ability in automotive segment, growth in unchartered non-auto verticals (backed by wiring harness) is already seen.

Outlook

We maintain BUY with revised TP of Rs165 (vs Rs147) at 20x Mar-23 consol EPS (v/s Sep-22), with unchanged earnings. Inorganic opportunities and growth in non-auto space remain key rating catalyst going forward.