Volume concerns still a worry for NMDCas revenues see little change

Uncertainty on Karnataka production keeps Street nervous after fall in first half earnings in Q2FY19

India’s largest iron ore miner, NMDC, with annual output of about 30 million tonnes (mt), continues its downtrend on the bourses after the 25 per cent decline in net profit reported by the company for the September 2018 quarter (Q2), and on worries over production volumes.

Though realisations in Q2 remained supportive at ~3,576 per tonne — up 1.1 per cent sequentially and 24 per cent year-on-year (YoY) — the decline in volumes (16 per cent YoY and 0.72 per cent sequentially) meant revenues from operations were almost flat YoY and sequentially.

With operating expenses down 3 per cent, operating profit (excluding other income) increased by 4.6 per cent YoY.

With the effective tax rate up at 51.5 per cent, from 31.9 per cent in Q2FY18 and 34 per cent in Q1FY19, the same led to a steep decline in net profit.

The favourable demand environment and supporting realisation trend is likely to continue, moving forward.

The three consecutive price hikes of about ~150 per tonne taken in the months of July, August and September will reflect fully in the current quarter.

However, constraints on sales volumes are worrying investors.

Sales volumes during the June quarter had suffered on account of lower off-take by a key customer in Karnataka, because of disagreement over pricing.

While iron ore volumes in Karnataka increased in the second quarter after resolution, off-take in Chhattisgarh fell significantly.

Volume concerns have further accentuated, given the mining lease extension for Donimalai mines in Karnataka may require NMDC to pay a significantly higher portion of sales value as rent, say analysts.

They feel aggressive bidding by players during recent rounds of auctions have led to this situation. After JSW Steel won the Mysore Minerals block (9.7 mt reserves) with a final price offer of 95.2 per cent, and MSPL won the Sri HG Rangangouda block with a final price offer of 129.2 per cent, NMDC has been asked to pay 80 per cent of sales value as lease rental.

As such, it has temporarily stopped production. Donimalai mines have a production capacity of 6 mt or 20 per cent of NMDC’s output. Edelweiss says NMDC has appealed in Court, but it will be a major blow to NMDC’s volume growth if the closure persists. It estimates a 15-17 per cent impact on its FY20 earnings.