Worst may be over for NMDC stock: Cash flows likely to improve, say experts

Margins may have bottomed out, say analysts

It’s been a roller coaster ride for the public sector undertaking (PSU) National Mineral Development Corporation or NMDC since the declaration of its July-September quarter results for the 2022-23 financial year (Q2FY23). The stock price went up to Rs 114 prior to the results and then dropped to Rs 105 before recovering to its current market price of Rs 111.

The metals and mining major saw a decline in net sales, of 51 per cent year-on-year (YoY) and 30 per cent quarter-on-quarter (QoQ), to Rs 3,300 crore in Q2. Iron ore sales volumes fell 6 per cent YoY (up 8 per cent QoQ) to 8.43 million tonnes (MT). The price and volume decline in iron ore reflects the demand slowdown.

The earnings before interest, tax, depreciation and amortization (ebitda) dropped 73 per cent YoY and 55 per cent QoQ to Rs 850 crore, indicating higher operating costs, which were partly offset by lower royalty and additional premium. Ebitda per tonne at Rs 1,009 was down 71 per cent YoY and 59 per cent QoQ with averaged realisations down at Rs 3,830 per tonne (down 49 per cent YoY/down 37 per cent QoQ). The adjusted profit after tax (PAT) fell 62 per cent YoY and 40 per cent QoQ to Rs 890 crore. PAT was also boosted by higher Other Income at Rs 420 crore (up 380 per cent YoY and 192 per cent QoQ). 

After imposition of export duty on steel (at 15 per cent), iron ore (50 per cent for all grades) and pellets (45 per cent) in May 2022, NMDC reduced the price of iron ore. However, after Aug 2022, NMDC has managed to hike iron ore prices slightly though it is still well below April 2022 levels. The rise in thermal coal prices has been a dampener on ore demand. 

On the corporate side, NMDC has demerged the steel plant with the shareholders of NMDC getting a similar number of shares in the NMDC steel plant. The demerger and listing of the shares in NMDC steel plant may or may not be a trigger. Given poor prevailing conditions, if there's a listing during this down-cycle, investors might sell the plant (stock), after listing. Private steel plants have lower capex/capacity compared to NMDC and this is again a reason why high valuations for the demerged asset don’t seem likely. 

Upsides to the mining business and an end to the downturn in ore price will depend on global factors. A global demand recovery could be led by China as and when the PRC economy picks up. That could be fully exploited by NMDC only as and when export duties are removed.

However, ore prices seem to have recovered slightly and stabilised in the last two months. Historical data suggests the margins are now at the bottom of the cycle and a financial recovery in the second half with stronger realisations is possible. Free cash flow should improve after demerger. 

The company has a strong balance sheet, with high levels of cash per share and lower capex required after the divestment. It is a stable dividend payer and the yield would be significant. Analysts assess fair value and target price between the Rs 124 and Rs 130 per share range. This implies a 15-20 per cent upside.