NMDC price cuts: Analysts say sustaining realisations crucial for earnings

NMDC’s price cut announcement in December soon after reporting strong jump in sales has dampened Street sentiment.

 

The stock, which had recovered slightly, slipped to its 52-week low a few days back and continues to trade weak.

 

The company’s latest volume numbers showed that sales volume surpassed the 3 million tonne (MT)-mark in October for the first time in FY19. This was buoyed by the Chhattisgarh segment.

 

However, the falling international iron ore prices led the company to cut rates for lumps and fines for the first time since April by Rs 300/tonne and Rs 200/tonne, respectively.

 

The iron-ore per tonne price ex-China for grade 62 has declined from close to $75 at the start of November to about $66 now, forcing NMDC to cut prices.

 

Analysts say the same was being anticipated in the wake of a reduction in iron ore prices by Odisha miners in November, price fall in long steel products and a decline in offtake by Chhattisgarh-based sponge iron units in November.

 

The decline in offtake by Chhattisgarh-based sponge iron-units will be a cause for concern, too, given that the demand from the state had boosted NMDC’s iron-ore sales and helped it cross the 3 MT-mark in October.

 

The company is already facing constraints in Karnataka volumes due to production halt at the Donimalai mine over the issue of higher rent demanded by the state government for extension of the mining lease.

 

This remains a major cause for worry as analysts feel that FY19’s sales volume may be impacted to the extent of 5 MT if production is not resumed at the Donimalai mine for the rest of the year.

 

Motilal Oswal securities has reduced iron ore sales estimates by 10/21 per cent to 30.9/32MT for FY19/20 .

 

With volumes under pressure, it is the realisations that will play an important role for the company’s revenue and profitability growth.

 

The only saving grace now is the limited downside to realisations. Analysts at Edelweiss, while not ruling out further price cuts if international iron ore prices continue to fall, believe domestic market supply would stay constrained if production continues to remain suspended.

 


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