Realisation concerns weigh on NMDC

Declining global iron ore prices and increased supplies have pulled down the share price but higher volumes and an improving product mix could partly offset the pressure

NMDC, the country's largest iron ore producer, has seen its share price fall almost 12 per cent after the Union Budget, to around Rs 128. Investor hopes on ore export duty cuts did not materialise and the company also has had to cut its domestic prices by Rs 300-500 a tonne for lumps and fines for the month of March, after another cut in February.

While the pressure of weakness in ore prices in the international markets is being felt, supplies in the domestic market have also increased after the easing of mining restrictions in Odisha. The fall in steel prices is another reason for the company to keep the basic raw material prices of ore in sync. These factors are likely to keep the stock under check in the near term.

However, the company continues to ramp-up its volumes, despite declining realisations. Ore production for the 11 months ending February was 27.82 million tonnes as compared to 26.42 mt in the year-ago period. The company is expanding mining in Karnantaka and Chhattisgarh and is likely to continue seeing higher volumes in the days to come.

The two new mines being developed are likely to be commissioned in a few quarters. Its first mine in the Bailadila sector in Chhattisgarh is likely to be commissioned this month. The second one, at the Bellary-Hospet region in Karnataka is likely to be commissioned by June. Analysts at HDFC Securities say its 1.2 mt per annum (mtpa) capacity pellet plant at Donimalai in Karnataka is also likely to be commissioned by June. All the value addition can boost profitability in the medium term.

Despite softer prices and ore supply bottlenecks posed by cyclone Hudhud and disruption of railways tracks due to extremist activities, the company was able to beat Street estimates during the December quarter too, majorly led by a better product mix. All these can accrue benefits in the medium term, say analysts.

While NMDC is trying to attain its target of 75 mtpa ore production by 2018-19, to meet the domestic steel industry's demand, it is also setting up a steel plant that is likely to be commissioned in FY17. Looking at these developments and the company’s strong balance sheet, coupled with good dividend history and cash reserves, the stock remains a ‘good buy’ on dips for investors with a medium to long term investment horizon.

Analysts at HDFC Securities, in a February 12 report: “We feel investors could buy the stock on declines to Rs a 124.50-129.25 band (8.3-8.6 times the FY16 estimated earnings per share and 4.0-4.2 times the FY16 estimated ratio of enterprise value to operating earnings), for a target of Rs 144 over one quarter." The consensus target price from analysts polled on Bloomberg during the month of March (after the Budget) is Rs 155.