Weak volumes, iron ore demand take sheen off NMDC's Q3 performance

While domestic outlook was seen improving post recent iron ore price hikes and rising steel output, coronavirus could curb gains

NMDC’s performance for December 2019 quarter (Q3) reflects the impact of subdued realisations and weak demand for iron ore, a key ingredient to produce steel.

Production and dispatches of iron ore, which had remained subdued in September quarter due to monsoon, rebounded in Q3 but were still down compared to the year ago period due to continued disruption at NMDC’s Donimalai mines. Withdrawal of monsoon enabled India’s largest iron ore miner to deliver a 71 per cent sequential rise in production at 8.58 million tonnes (MT), but it was 10 per cent lower on year-on-year (YoY) basis. Sales at 8.41 MT were also up 45 per cent sequentially, but 3 per cent lower YoY. Thanks to price cuts taken during Q3, NMDC’s average per tonne domestic realisation at Rs 3,557 too fell by 14 per cent YoY. Not surprising, standalone revenues from operations (Rs 3,006.4 crore), operating profit (Ebitda; Rs 1,527 crore) and profit before tax (Rs 1,647 crore) were down 18 per cent, 25 per cent and 26 per cent YoY, respectively in Q3, and were a tad lower than analysts’ expectations. Lower tax outgo somewhat cushioned net profit (Rs 1,376.4 crore), which fell by 13 per cent YoY.

Weak operational numbers pulled down NMDC’s stock by 2.4 per cent on Friday, more than the 0.4 per cent fall in Sensex.

Notably, even as it was seeming that the bad phase was ending for NMDC, fresh headwinds have cropped up.

NMDC had hiked the per tonne price of iron ore fines and lumps by Rs 550 and Rs 600, respectively in January. Consequently, analysts expected its domestic realisation to jump 25 per cent sequentially in the ongoing quarter. With improving steel prices and production in India, iron ore demand and volumes were also to get a boost. Analysts also expect NMDC to benefit from restart of operations at Donimalai mines post favourable amendment of ‘Mineral rules’ with regards to renewal of leases.

Due to recent price hikes and shift to lower tax rate, post Q3 results, analysts at Motilal Oswal Securities have raised their Ebitda estimate for FY20 by 9 per cent. NMDC’s first interim dividend of Rs 5.3 per share (yield of 4.5 per cent) is another positive, and its upcoming steel plant (3.1 MT; commissioning in second half FY21) should also add value.

However, some of these gains may get delayed due to uncertainty arising on account of coronavirus. Already, the price of steel and iron ore in China, its largest consumer globally, is down over 5 per cent in the past few days. NMDC’s share price, too, is down sharply from its 52-week high of Rs 139.50 scaled on January 23.

Clearly, the Street is watching developments on these fronts.