Street cautious on NMDC despite volumes, realisations gain; stock falls

Robust 27 per cent growth in shipments for NMDC in the first four months of FY20 and firm pricing for August after a strong Q1 performance were not enough for a vote of confidence from the Street. At present, the stock is trading 13-14 per cent below its early July highs.

Strong output numbers and growth in dispatches continue, even after mining disruptions in Karnataka. The company announced a 24 per cent jump in production and 27 per cent increase in dispatches in the first four months of FY20. The momentum seen in the first quarter is continuing in the current quarter as well. Analysts at Edelweiss feel the impressive ramp-up at Kumaraswamy mines in Karnataka makes up for the shortfall on account of the outage at Donimalai.

Moreover, the realisations that drove Q1 profitability continue to remain firm as the company maintained prices for its production during August despite the period being impacted by rains. Firm international prices, up 43 per cent year-on-year (YoY), due to restricted supplies are helping NMDC maintain pricing and benefit from better export realisations. The company had reported a 30 per cent jump in Ebitda and 21 per cent YoY jump in profit during the June quarter.

However, there are multiple concerns for the Street. The weak steel demand and prices can put pressure on domestic iron ore prices if the trend continues. Analysts at Motilal Oswal Financial Services (MOFSL) expect domestic prices to retreat in the second half of FY20, given an oversupplied market, higher availability prior to mine lease expiry (by March ’20 for Odisha miners) and some tapering off in global prices.

While the Karnataka High Court has struck down the levy of 85 per cent premium demanded by the Karnataka state government as a prerequisite for lease renewal, resumption of mining will depend on other approvals, which will take time. Some analysts expect the forest and environmental clearance approvals to come during the current financial year. However many expect it to take longer. MOFSL expects the restart of the mine could be at least 1-2 years away.

Also, there is still uncertainty with respect to the commissioning of a new steel plant, which is an overhang on the stock. The steel plant is expected to be a significant value enabler once operational.

While valuations are 3.9 times FY21 operating profit, according to Edelweiss Research, the Street remains watchful.