Higher vol­umes to cush­ion NMDC

Risks to pric­ing re­main but good vol­ume growth and at­trac­tive val­u­a­tions are keep­ing an­a­lysts pos­i­tive on the stock


Govern­ment-owned min­ing en­tity NMDC’s per­for­mance for the quar­ter ended Septem­ber re­flects the pre­vail­ing weak iron ore pric­ing trend.

Ex­pec­ta­tions of a cut in Chi­nese steel pro­duc­tion dur­ing the win­ter sea­son, thereby mut­ing iron ore de­mand, is putting pres­sure on the com­mod­ity’s prices. The per­tonne ore price (ex-China) has fallen from about $95 in Fe­bru­ary to $62.

As a re­sult, NMDC’s stock price has fallen from ~152 in early March to ~125.3 now. Mov­ing for­ward, while volatil­ity in iron ore prices might con­tinue, grow­ing vol­umes could pro­vide sup­port, feel an­a­lysts. They also say the val­u­a­tions have be­come at­trac­tive, keep­ing them pos­i­tive on the stock.

NMDC’s re­sults for the first half of 2017-18 also pro­vide some con­fi­dence. Since Septem­ber quar­ter re­sults tend to get im­pacted by the mon­soon, it isn’t sur­pris­ing that sales vol­umes at 8.3 mil­lion tonnes are down se­quen­tially from 9.2 mt in the June quar­ter. How­ever, year-on-year, these are up four per cent. In fact, for the first half of FY18, pro­duc­tion and sales vol­umes have grown 11-13 per cent, yearon-year. Thus, the vol­ume trend re­mains pos­i­tive.

Re­al­i­sa­tions, on the other hand, de­clined se­quen­tially; how­ever, these were ahead of an­a­lyst es­ti­mates in the Septem­ber quar­ter. Per tonne re­al­i­sa­tion at ~2,836 was lower than ~2,938 in the June quar­ter but way bet­ter than these es­ti­mates. For in­stance, Moti­lal Oswal Se­cu­ri­ties had out these at ~2,705 a tonne. This, cou­pled with bet­ter cost con­trols de­spite ris­ing wages, led to NMDC’s re­ported earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (Ebitda) at ~1,317 crore, again ahead of Bloomberg an­a­lysts’ es­ti­mate of ~1,243 crore.

Even af­ter ad­just­ing for other in­come and non-re­cur­ring credit loss, as well as rail line dou­bling ex­penses, Ebitda at ~1,285 crore beat the Street es­ti­mates. Re­ported rev­enues were marginally lower than the es­ti­mates. Con­se­quently, net profit at ~844 crore (up 10 per cent year-on-year) came close to the ~852 crore in con­sen­sus es­ti­mates.

Re­al­i­sa­tions got a push from a higher share (38 per cent) of iron ore from Kar­nataka mines. Higher prod­uct and re­gional pre­mi­ums also sup­ported re­al­i­sa­tions, say an­a­lysts. Kar­nataka, hav­ing limited ore sup­plies, still en­joys bet­ter re­al­i­sa­tion than other re­gions. Go­ing ahead, ad­e­quate avail­abil­ity led by im­proved off­take from Odisha mines, cou­pled with de­clin­ing global iron ore prices, is likely to keep a check on re­al­i­sa­tions for In­dian com­pa­nies. So, an­a­lysts don’t rule out some pres­sure on NMDC’s. Vol­ume, val­u­a­tions How­ever vol­ume growth re­mains firm and should cush­ion any down­side, says Goutam Chakraborty of Emkay Global. The stock val­u­a­tions are also at­trac­tive. An­a­lysts at Moti­lal Oswal Se­cu­ri­ties say while there is some risk to iron ore pric­ing, at the cur­rent mar­ket price af­ter ad­just­ing for the cost of works in progress, the val­u­a­tions at 3.3 times the ra­tion of FY19 en­ter­prise value to Ebitda are com­pelling. They see a 48 per cent up­side to the stock price from the cur­rent lev­els.

There are other trig­gers as well, which could sur­prise on the up­side. An­a­lysts at ICICI Se­cu­ri­ties, for in­stance, ex­pect min­ing dis­rup­tion in Odisha to drive up ore prices. The Supreme Court has di­rected Odisha miners to pay ~17,000 crore of levies to re­sume/restart min­ing. The bro­ker­age says their study of many of the large and small en­ti­ties high­light that as the leases were any­way ex­pir­ing in 2019-20, it doesn’t make sense to pay the hefty fine and re­sume min­ing. This needs to be watched, as the pay­ments were to be made by De­cem­ber 2017.

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