Favourable winds for NMDC stock

Good profitability in June quarter and rising iron ore prices paint a bright picture

After seeing a steep correction between February and June, the NMDC stock has rebounded 15 per cent to Rs 121 levels. More gains are likely.

While the stock's correction was due to declining iron ore prices, recovery in prices and strong June quarter performance lifted sentiment. From highs of $90 a tonne in February, iron ore prices had fallen to $50 levels by June-end. The price is now close to $75 a tonne.

Despite a correction in iron ore prices during the June quarter, profitability of NMDC improved. Earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne, at Rs 1,628, surged 55 per cent year-on-year and 71 per cent sequentially. NMDC being able to hold on to the price hikes taken in the March quarter, despite declining iron ore prices, was one of the reasons for better profitability. The support came from strong demand as Karnataka auction prices increased 4-9 per cent, say analysts at Kotak Institutional Equities.

The company also surprised with higher-than-expected exports. The management, say analysts, indicated towards higher average prices in export markets despite global prices falling.

Per-tonne realisation at Rs 3,094 improved 40 per cent year-on-year and 5.3 per cent sequentially. NMDC also did well on controlling operating costs. Per-tonne basis costs declined 26 per cent sequentially; though up 26 per cent year-on-year, the increase in profit was much faster. All this saw net profit surging 38 per cent year-on-year and 89 per cent sequentially in the June quarter.

While the company had taken price cuts of about Rs 200 a tonne for its iron ore in July and rolled over prices for August, the rebound in international prices has increased possibility of NMDC hiking prices again. Rising steel demand and firm steel prices also bode well and should lend support to iron ore prices. Analysts at IIFL say the crackdown on polluting plants in China boosted demand for high grade ore. This led IIFL to increase their iron ore price estimates marginally, factoring stronger than expected demand in China. While analysts remain watchful on China's steel production, especially in winter season, most of them have upgraded their ratings for NMDC.

Analysts at Antique Stock Broking say NMDC's domestic fine prices are at a significant discount to international prices, leading to the possibility of price hikes. They have a target price of Rs 150 for NMDC's stock. Analysts at ICICI Securities expect the sales volume to see compound annual growth of 6 per cent in FY17-19 and arrive at a target price of Rs 140, while IIFL's is at Rs 135. All these indicate an upside potential of 12-25 per cent for the stock.