Margin concerns weigh on NMDC stock despite stellar performance in Q4

NMDC cashed in on the global metals boom, going by the Q4FY21 results. The PSU, which is India's biggest producer of iron ore, registered Rs 6,848 crore in revenues, a rise of 148 per cent over Rs 3,187 crore reported in Q4FY20. The PAT expanded to Rs 2,828 crore against Rs 351 crore a year ago, a rise of over 700 per cent. NMDC's turnover for FY21 was Rs 15,370 crore versus Rs 11,699 crore in FY20 -- growth of 31 per cent. The PAT for last financial year was Rs 6,253 crore, against Rs 3,610 crore the previous year.

NMDC produced 34.15 million tonne (mt) and sold 33.25 mt of iron ore during FY21, a YoY rise of 8 per cent and 6 per cent, respectively. The Q4 production rose almost 30 per cent YoY. The Ebitda margin for FY21 rose to 60 per cent, from 55 per cent a year ago. Free cash flow from operations, too, jumped to Rs 5,995 crore from Rs 236 crore in a year.

The average price realised per tonne of ore was Rs 4,355 (domestic) and Rs 4,581 (exports) in FY21, versus Rs 3,438 (domestic) and Rs 3,671 (exports) in FY20. In Q4, the per tonne realisations were Rs 5,941 (domestic) and Rs 6,138 (exports) against Rs 3,473 (domestic) and Rs 3,674 (exports) in the year-ago period.

The overall rise in production was a pleasant surprise, given the lockdown in Q1FY21. Analysts say the royalty incidence was lower than expected and was a bit of a puzzle. Also, Rs 234 crore for provisions was noted for bad or doubtful debts in the cash flow statement. A government subsidy on exports ceases from Q1FY22 and there will be an export duty of 30 per cent on exports in this financial year. Railways freight concessions are also removed, implying potentially higher expenses.

The board of NMDC has agreed to demerge its steel plant, implying that it will be spun off and listed separately. This can unlock value downstream for minority shareholders. The Government of India holds roughly 69 per cent of equity, apart from a controlling stake in various minority shareholders, such as government-owned insurance companies.

The key factor for NMDC’s future performance is the global metals cycle. If the cycle stays strong through FY23, the profitability can rise in this financial year and even the next. There’s consensus that the cycle will stay up for at least another 12-18 months.

Obviously, a correction in global prices will also drag down domestic prices. But the withdrawal of export subsidy and the imposition of 30 per cent in export duty means that there must be a substantial differential regarding global prices for NMDC to continue with exports. This may also mean that realisations per tonne will plateau.

Despite a stellar Q4, the stock has been sold down after the results, losing about 3.5 per cent in the last session. It’s down 16 per cent from its 52-week high of Rs 213, which was recorded in mid-May. Investors may be assuming the Ebitda margin and price realisations are at peaks, or near peaks, thus reducing potential EPS growth in FY22.