NMDC shines on rising iron ore prices, shares continue to gain on bourses

A favourable supply scenario for the steel-making raw material is expected to drive the company's earnings

Shares of NMDC continue to gain on the bourses (up 4.4 per cent on Wednesday) even as the leading indices remain under pressure. Over the last one and six months too, the stock has beaten the BSE Metal index. The prospects remain firm as rising international prices of iron ore bode well for realisations of NMDC, India’s largest producer of this key raw material used to make steel. The ex-China price of 62 per cent Fe grade iron ore, which was close to $90 a tonne at the start of April and $100 a tonne in June, are now close to $120 a tonne.

According to analysts, weak iron ore exports from Brazil post the disruption at Vale mines, and declining inventory at Chinese ports suggest that iron ore prices may sustain at over $100 per tonne in the near term. 

While higher international prices will support domestic prices, the demand also gets a boost in absence of imports by steel manufacturers having proximity to ports. NMDC, too, is seeing strong demand momentum helping it maintain volumes despite the disruption at its Donimalai mines in Karnataka. NMDC’s volume off-take was up 34 per cent year-on-year during April-May 2019.

While June numbers are not available yet, analysts at ICICI Securities estimate a 32 per cent growth in volumes during the June quarter. Attractive prices are aiding off-take and NMDC remains on track to achieve its FY20 volume guidance of 32 million tonnes per annum (mtpa), say analysts at Kotak Institutional Equities. In FY19, the company had clocked volumes of about 32.4 mtpa.

With stable volumes and improving realisations, it is not surprising that the Street sentiment has remained firm. Analysts, too, are upgrading their ratings for the stock. Analysts at Edelweiss say that unlike its peers, NMDC’s FY20 EBITDA is likely to sustain at the FY19 level owing to stable volumes and pricing. EBITDA is earnings before interest, tax, depreciation and amortisation. The analysts have raised their iron ore price estimates by 5 per cent each for FY20 and FY21 and upped their ratings from Hold to Buy. 

Moreover, the restart of Donimalai mines can lead to a 10 per cent increase in fair value of the stock. Also, while the steel plant commissioning had continued getting delayed, it is now seen started by FY21. 

On the whole, most analysts are positive on NMDC. According to Bloomberg, over 75 per cent have a buy rating on the stock, and their average one-year target price indicates a potential upside of over 14 per cent.