Multiple triggers to drive NMDC re-rating, firm to consider share buyback

While recent hikes have pushed iron ore prices to 24-month highs, analysts also expect sustained improvement in operating performance

Recovery in domestic steel demand and the rise in steel prices have improved the outlook for India’s largest iron ore producer, NMDC. The company announced a Rs 200 per tonne price increase for its November produce, helping prices of iron ore fines and lumps rise to Rs 3,310 per tonne and Rs 3,610 per tonne, respectively.

With this, NMDC’s iron ore prices have risen by Rs 1,350 a tonne since June end after price cuts of about Rs 900 a tonne during April and May to push volumes impacted. At current levels, prices are at a 24-month high.

While India’s steel production is improving, international iron ore prices are also supporting this with ex-China prices having rebounded by about a third to about $120 a tonne. Higher international prices not only aid the company’s realisations outlook but also curb imports by steel producers who have access to ports, improving demand for NMDC’s produce. Analysts also say iron ore shortage due to lower production from Odisha-based mines is helping domestic realisations. While fresh auction of mines in Odisha were held in February, 12 of 19 mines are yet to commence production, say analysts.

NMDC’s October sales volume at 2.5 million tonnes (MT), too, have improved from 2.1 MT in September. Cumulative sales volumes till October of 15.42 MT are lower than 17.14 MT seen during the corresponding period last year, but that is due to the impact of lockdowns on demand. Volumes have been improving gradually after unlock.

 

Analysts at Prabhudas Lilladher expect NMDC’s iron ore volumes to grow by 3.5 per cent sequentially to 6.5 MT in the September quarter (Q2), and realisations to improve by 14 per cent sequentially to Rs 3,500 per tonne. Improving realisations are expected to boost NMDC’s profitability and Q2’s per tonne Ebitda is pegged at Rs 1,665, a 38 per cent rise over Q1.

With recovery driven by improving realisations and volumes, analysts are positive on NMDC’s forward prospects, led by rising domestic steel production. The company is also undertaking various measures to improve output. NMDC is implementing multiple projects to expand annual capacity from 43 MT to 67 MT over the medium term. The doubling of the 150-km Kirandul-Jagdalpur rail line is likely to improve annual evacuation capacity to 40 MT from 28 MT now.

In the near term, the restart of Donimalai mines (7 MT per annum capacity) after almost two years is also being seen as a key trigger. The Karnataka government had cleared NMDC’s application for resuming mining operations recently. The completion of 3 MTPA steel plant and its demerger as proposed by the company could also help unlock value for shareholders. Domestic brokerage IIFL sees commissioning of the steel plant (mid-2021) without further equity investment and restart of the Donimalai mines as near-term triggers.

The demerger of steel plant will protect mining cash flows from steel business requirement and may lead to re-rating, feel analysts at HDFC Securities, who remain positive on the stock considering the additional attraction of 5 per cent dividend yield. Motilal Oswal Securities had already raised their FY21 and FY22 Ebitda estimates by up to 15 per cent and target price to Rs 132, for the stock trading at Rs 90.35.

Meanwhile, the company will also consider the proposal for buyback of the fully paid-up equity shares at its board meeting scheduled for November 10. That can improve investor sentiments as well.