Despite price cuts, NMDC outlook firm
Strong rebound seen in profitability in March quarter and FY19
NMDC’s decision to cut iron ore prices by three to four per cent or ~100 a tonne from March 1 might have weighed on Street sentiment but analysts say the prospects remain healthy. They say some price cuts were expected, as NMDC had consistently raised prices of iron ore lumps and fines, taking the total increase to 34 per cent and 38 per cent, respectively, since November.
The move has surprised some, given that iron ore prices ex-China touched a 10-month high of $79.95 a tonne in February end . Its price hikes during November-February had been supported by rising international prices from sub$60 a tonne, and mining disruptions in Odisha. With the restart of some mines in Odisha after mid-February, some adjustment was anticipated. The bigger gain, as the Street sees it, will come in the form of higher volumes. Production at 24.3 million tonnes (mt) during first nine months of FY18 was up three per cent, while dispatches at 25.5 mt were down one per cent over a year-ago period.
Lower prices should come handy in achieving the FY18 sales target of 36 mt, as domestic demand remains supportive. CRISIL Ratings agency, in its India outlook for 2018 on Monday, said it was positive on the steel sector. Although the past few days have seen worries over trade protection measures proposed in the US, analysts believe the impact is unlikely to be meaningful in the medium term. This month steel players have hiked prices by ~1,000 a tonne, taking the cumulative rise to 11 per cent since December. Firm steel prices should prove supportive for iron ore. NMDC also announced the commissioning of a 220-Kv main power-receiving substation on March 1. Analysts at Edelweiss Securities expect its pellet plant to commence operations this month and contribute to earnings from the June quarter. They expect incremental operating profit of ~4-4.5 billion from this plant. As its steel plant begins operation around end-FY19, expect bigger gains. Motilal Oswal Securities, after the December quarter results, had said NMDC’s stock valuations were ignoring the value of steel plant.
For now, most analysts expect a strong rebound in profitability in the March quarter, too. Analysts at Kotak Institutional Equities expect this, on the back of 1922 per cent increase in iron ore prices. Given target prices of analysts of ~151 to ~215, any correction is an opportunity to accumulate, the stock trading at ~123.