International iron ore futures have surged to over $100 per tonne from $80 in April-May after Brazil’s Vale SA was ordered to suspend operations after its workers contracted
coronavirus. Consequently, NMDC
has also been able to raise prices for its produce, after cumulative price cuts of Rs 900 a tonne in April-May, amid weak domestic demand.
Given the disruption in supplies from Brazil, analysts believe international iron ore prices could hold above $100 till August at least. The company’s July production, thus, should fetch realisations that are higher by Rs 250 a tonne.
Domestic iron ore prices were at 45 per cent discount to import parity prices in June versus the historically 10 per cent discount, point out analysts. This allows some space to domestic players to raise ore prices. For NMDC, the disappointment in the March quarter performance was also led by lower-than-expected realisations. Hence, rising realisations are a positive.
The concerns on the volume front, however, haven’t eased. While sales volumes in the March quarter were down 16 per cent year-on-year (YoY) to 8.6 million tonnes (mt), the impact on the June quarter (Q1FY21) volumes has been higher. Cumulative sales are down 26.5 per cent YoY in Q1FY21 to 6.41 mt. Hence, the June quarter financial performance, too, will remain weak.
While some respite is in the offing looking at improving capacity utilisation of domestic steel manufacturers since June and uptick in India’s economy after the lockdown, the September quarter is historically a weak quarter because of monsoon. Therefore, the company may not see significant gains before the second half of FY21. Any fresh disruption due to rising Covid-19 cases also remains a risk.
Analysts at Emkay Research, too, say they remain concerned about rising cases of Covid-19 amid the onset of monsoon and a traditionally weak quarter for steel and ore.
The stock, however, trades at inexpensive 5.4x its enterprise value/Ebitda based on FY22 estimates of Kotak Institutional Equities, and analysts at Motilal Oswal Financial Services after lowering their FY21 and FY22 Ebitda estimates by 12 per cent and 13 per cent, respectively, still see an upside of 30 per cent. Valuations, thus, could provide downside support.