Good opportunity to enter NMDC stock

With tight supplies and growing demand, volumes and prices seem firm

The 10-plus per cent fall in the scrip of NMDC, the government-owned iron ore mining company, from its 52-week high of Rs 149 last month, on the back of weak global prices, offers a good opportunity for investors to enter.

The company is unlikely to be impacted by this fall and should see stable prices for its produce, given the ore’s short supply in India. After the Karnataka and Goa bans on its mining, the Shah commission’s recommendations for Odisha are likely to keep this under check there, too. With this, the risks for realisations, already lower than the landed cost of imports, remain limited. With volume growth rising, expect NMDC’s revenues and profitability to improve in FY15.

Analysts also feel the stock is currently not factoring in the good dividend yield (around six per cent) and the huge cash on the books (averaging to Rs 57 a share). Analysts at IDFC say there could also be a positive Ebitda (earnings before interest, taxes, depreciation and amortisation) surprise from the capital expenditure undertaken (in-motion weigh bridge for improving railway rake availability, 1.2 million tonnes per annum pellet plant, etc). The consensus target price of 28 analysts polled by Bloomberg since February is Rs 157, indicating an upside of 17 per cent from the current Rs 134.

Ore prices
Over the past two months, international iron ore prices have declined 22 per cent from $135 a tonne to $105 a tonne. In India, prices are already at a significant discount to the former. Thus, the decline in international prices should not lead to one at home, feel analysts at Ambit Capital. The company reviews prices of iron ore every month and has kept this month’s at February’s Rs 4,500 a tonne for lumps and Rs 2,910 a tonne for fines.

Meanwhile, as noted earlier, the Shah commission’s observations on mining in Odisha — environmental sustainability, transparency through measures such as e-auctions, higher control and a cap on mining, would mean ore output from the state would be checked.

Analysts at Antique Broking say overall domestic iron ore production declined at a compounded annual rate of 10.6 per cent from FY09 to FY13 (when it was only 136 million tonnes), tightening domestic supply. The Shah commission is likely to recommend further restrictions on annual output from the Odisha mines, to 50-55 mt from FY13’s 64 mt, and a possible ban/restriction on exports.

More, capacity additions in the steel sector bode well for ore demand and prices. Of the 28 mt of annual steel capacity being added over FY14-16, seven mt has no captive ore supplies. This is a positive for NMDC, believe analysts at Antique.

Volume boost
NMDC ended FY13 with a production of 26.3 mt. It is likely to see better volumes  till FY16. In the first 11 months of FY14, it saw production of 26.4 mt; sales were 27.4 mt, compared to 23.4 mt during April 2012-February 2013. Analysts at ICICI Securities say NMDC should easily achieve their FY14 estimated ore sales assumption of 29.4 mt.

Led by growing production, the company’s volumes are likely to grow at a compounded annual rate nine per cent during FY13-16, estimate analysts at IDFC. While its mines in Karnataka, Chhattisgarh and Odisha are seeing a ramp-up,  starting of the Essar slurry pipeline will also boost volumes.

In the recently concluded analysts’ meet, NMDC is said to have forecast the Karnataka ore pellet unit getting operational by October; it is likely to start its steel project by the second half of FY17, at an investment of Rs 3,500 crore. These will be further positive for the company. The key risk is a significant (higher than expected) slowing in China, leading to a further fall in global iron ore prices.