NMDC, the country’s largest iron ore producer, had to cut the price of its produce by Rs 100 a tonne from April 18, due to decline in international prices. The per tonne iron ore price, excluding China, has corrected from over $75 levels in end-February to sub-$65 by start of April on fears that the global tariff wars would impact steel and iron ore demands.
China’s steel demand was also seen to be a bit weak. Consequently, NMDC, which had seen continued rise in prices of iron ore lumps and fines (up 34 per cent and 38 per cent respectively since November 2017), had to cut it by 3-4 per cent in March and by another 3-4 per cent from 18 April to Rs 2,900 for lumps and Rs 2,560 for fines.
While the price cuts will affect its revenue and profits, and thereby leave their impact on the street sentiment, the correction is an opportunity for long-term investors, observe analysts. The steel demand in India continues to grow and is expected to increase by 5 per cent in FY19. Similarly, the demand for iron ore is also likely to remain strong.
More importantly, NMDC is increasing its mining capacity, which will help sustain growth. NMDC proposes to augment its iron ore production capacity in phases to 67 million tonnes per annum (mtpa) by FY22 from 34.05 mtpa in FY17. The removal of produce has improved too. In the March quarter, analysts at Kotak Institutional Equities estimated NMDC's iron ore sales to rise by 8 per cent year-on-year to 10.5 MT (up 31 per cent sequentially). Further, NMDC, with its long-term mining leases, is already expected to benefit as a number of private mining leases will expire by end of FY20.
The company is in the process of integrating with more value-added products in the steel chain. It is setting a three-mtpa steel plant and has embarked on margin enhancing projects by setting up pellet-making plants, which will start adding to NMDC’s earnings even before the steel plant does. Sales of pellets, used for steel production, are more profitable and analysts expect pellet sales to contribute further to the earnings. Looking at the increased demand for pellets, analysts at Edelweiss Securities expect an incremental Ebitda (Earnings before interest, tax, depreciation and amortization) of Rs 4.0-4.5 billion in FY19.
For the March 2018 quarter, analysts at Motilal Oswal Securities estimate NMDC’s Ebitda to increase by 54 per cent sequentially to Rs 20.4 billion, led by higher iron ore prices and a recovery in volumes as the rail infrastructure issue (easing transportation hurdles) has been resolved. Their target price of Rs 225 indicates a significant upside from the current levels of Rs 124, as they believe valuations are ignoring the value of its steel plant.
HDFC Securities, too, had recommended investors to add the stock on dips around Rs 119-123, indicating an enterprise to Ebitda valuation of 4.5x based on FY20 estimates, for targets ofRs 163 over next few quarters. In addition, investors can also look forward to a 4-5 per cent dividend yield.