Higher prices, volumes key positives for iron ore miner NMDC stock

Iron ore major National Mineral Development Corporation (NMDC) looks like an interesting prospect. The public sector undertaking (PSU) has spun off its steel plant as a listed concern, NMDC Steel. It has hiked ore prices four times since November 2022, after removal of export duty, in response to strong trends. Overall, this is a 42 per cent hike in ore prices (averaged across fines and lumps) since November 2022, suggesting margin expansion and earnings upgrades in the fourth quarter of the 2022-23 (Q4FY23).

The hikes have been prompted by stronger seaborne ore prices and removal of export duty. China reopening and cutting its own carbon-intensive steel production has created export demand. NMDC’s prices are still at a considerable discount (30 per cent) to imports so there’s a margin of safety for the domestic business.

Volumes, though, are down and the share price hasn’t responded. In the 11-month period of FY23, sales volumes are down 8.6 per cent year-on-year (YoY). The export duty imposed between April-November 2022 was a key factor in reduction.

NMDC’s stated target of 50 million tonnes or MT (up 25 per cent YoY) in FY24 is unlikely to be met. Most analysts project 41-43 MT as likely range for FY24 volumes, which would be a recovery over the projected 38 MT of FY23 and likely exceed 41 MT volumes of FY22.

The hikes should drive significant margin expansions with Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne realisations in Q4FY23 almost doubling compared to Q3. Margin expansion may moderate in FY24 but still remain 5-6 per cent higher than what was achieved in FY23. The company has an excellent balance sheet, and a record of high dividend payouts, which may be in the range of Rs 14-plus per share. The NMDC Steel demerger offers comfort, since this reduces capex overhang on the balance sheet.

The company is likely to push iron ore capacity up, from the current rated 50 MTPA to 70 MTPA, which would leave it well-placed to meet demand in the next up cycle. India’s crude steel production saw an uptick of about 5.5 per cent YoY to about 125 MT in the 2022 calendar year. Most steel companies have optimistic guidances for volume growth in Q4FY23 and beyond. In aggregate, steel production capacity is due to double over the next few years with SAIL, JSPL, JSW and Tata Steel, all looking to expand.

The capex is driven by policy thrust on infrastructure and construction, along with hopes for improved demand for automobiles. After China reopening, international prices have rallied and NMDC is a beneficiary. Capex to set up a 2-MT pellet plant, which will commence production by Q3 or Q4FY24, should also boost margins.

The demerger of NMDC Steel, with its 3MT capacity has some positive implications. Shareholders received 1:1 shares in the listing. The government of India holds 60.8 per cent in NMDC Steel and is looking to sell 50.8 per cent of stake. The remaining 10 per cent stake will be re-acquired by NMDC, in an all-cash deal. While this cross-holding transaction impacts reserves, there are no further capex implications in the steel business for the PSU.

Apart from raising mining capacity to 70-75 MTPA, the firm is doubling railway line capacity and is in talks with Indian Railways to double its loading rake capacity to 30 rakes, from its current 15-16 rakes. The capex earmarked stands at Rs 2,000 crore for FY23 and another Rs 1,600 crore for FY24.

The demerged NMDC stock trades at Rs 108-109, down from around Rs 112, a month ago. There are fair value/target calculations of Rs 150 to Rs 155 for the share, which is a serious upside.