NMDC continues downtrend on bourses as rising volume concerns worry Street

After soft volumes pulled down earnings in the first half of FY19, uncertainty on Karnataka production is keeping the Street nervous

NMDC, India's largest iron ore miner with an annual output of about 30 million tonnes (mt), continues its downtrend on the bourses post the 25 per cent decline in net profit reported by the company for the September 2018 quarter (Q2), and on worries over production volumes.    

For Q2, though realisations remained supportive and at Rs 3,576 per tonne were up 1.1 per cent sequentially and 24 per cent year-on-year, the decline in volumes (by 16 per cent year-on-year and 0.72 per cent sequentially) meant that revenues were almost flat year-on-year and sequentially. With operating expenses down just three per cent, operating profit declined by about six per cent year-on-year. With the effective tax rate up at 51.5 per cent from 31.9 per cent in Q2FY18 and 34 per cent in Q1FY19, it led to a steeper decline in net profit. 

The favourable demand environment and supporting realisation trend is likely to continue moving forward. The three consecutive price hikes of about Rs 150 per tonne taken in the months of July, August and September would fully reflect in the current quarter. 

However, constraints on sales volumes are worrying investors. Sales volumes during the June quarter had suffered due to lower off-take by a key customer in Karnataka due to disagreement over pricing. While Karnataka iron ore volumes increased in Q2 post-resolution, off-take in Chhattisgarh fell significantly.  

The volume concerns have further accentuated as mining lease extension for Donimalai mines in Karnataka may require NMDC to pay a significantly higher portion of sales value as lease rent, say analysts, who feel that aggressive bidding by players during recent rounds of auctions has led to this situation. Post JSW Steel winning the Mysore Minerals block (9.7 MT reserves) with final price offer of 95.2 per cent and MSPL winning Sri HG Rangangouda block with final price offer of 129.2 per cent, NMDC has been asked to pay 80 per cent of sales value as lease rental. As such, it has temporarily stopped production. Donimalai mines have a production capacity of 6 mt, or 20 per cent of NMDC's output. Edelweiss says that NMDC has appealed in court, but if the closure persists, it will be a major blow for NMDC's volume growth and they estimate a 15-17 per cent impact on its FY20 earnings.