NMDC stock: Growing steel production supporting iron ore demand

The 62% Fe ore prices ex-China had corrected from more than $75 a tonne to sub $65 levels during the February-May period

The NMDC stock having corrected by about 29 per cent from its January highs is looking up in the recent weeks. Though declining iron ore prices in the international markets had led to the decline, the street is enthused by price hikes announced by the company at the end of May, strong quarterly performance last week and recent production numbers.   

The 62 per cent Fe ore prices ex-China had corrected from more than $75 a tonne to sub $65 levels during the February-May period. This had led the company to take some price cuts. However, strong demand in the country with rising steel production is supporting prices, allowing it to raise prices by about 4-5 per cent, respectively, for lumps and fines recently.

Analysts at Motilal Oswal Securities believe that iron ore fundamentals are strong in India, and NMDC’s key customers RINL and JSW Steel are increasing the steel production. This allows NMDC to keep its prices steady, despite volatility in the international markets. The company’s March quarter performance too indicates strong realisations. 

While the company saw 7.8 per cent growth in volumes, it was higher realisations that drove a 35 per cent rise in revenues as profits more than doubled during the quarter. The recent production numbers for May 2018 show 88 per cent growth over April with despatches more than doubling in May. Analysts remain confident of production and sales outlook moving forward supported by demand and improvement in logistical infrastructure.

Analysts at Edelweiss Research expect NMDC to sustain its operational performance led by an improvement in prices, volume uptick due to railway line restoration and steel capacity ramp up by smaller players. What should add to the performance is the expected annual operating profit contribution from pellet plant at Rs 4.5 billion. The recently started pallet plant will contribute well in FY19 and analysts expect 22 per cent compounded annual growth in company’s operating profit over FY18- FY20.  Additionally, dividend yield too remains attractive at 4-5 per cent levels.