Higher volumes to cushion NMDC, risks to pricing remain

Good volume growth and attractive valuations are keeping analysts positive on the stock

Government-owned mining entity NMDC’s performance for the quarter ended September reflects the prevailing weak iron ore pricing trend.
 

Expectations of a cut in Chinese steel production during the winter season, thereby muting iron ore demand, is putting pressure on the commodity’s prices. The per-tonne ore price (ex-China) has fallen from about $95 in February to $62.

As a result, NMDC’s stock price has fallen from Rs 152 in early March to Rs 125.3 now. Moving forward, while volatility in iron ore prices might continue, growing volumes could provide support, feel analysts. They also say the valuations have become attractive, keeping them positive on the stock.

NMDC’s results for the first half of 2017-18 also provide some confidence. Since September quarter results tend to get impacted by the monsoon, it isn’t surprising that sales volumes at 8.3 million tonnes are down sequentially from 9.2 mt in the June quarter. However, year-on-year, these are up four per cent. In fact, for the first half of FY18, production and sales volumes have grown 11-13 per cent, year-on-year. Thus, the volume trend remains positive.
 

Realisations, on the other hand, declined sequentially; however, these were ahead of analyst estimates in the September quarter. Per tonne realisation at Rs 2,836 was lower than Rs 2,938 in the June quarter but way better than these estimates. For instance, Motilal Oswal Securities had out these at Rs 2,705 a tonne. This, coupled with better cost controls despite rising wages, led to NMDC’s reported earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 1,317 crore, again ahead of Bloomberg analysts’ estimate of Rs 1,243 crore.

Even after adjusting for other income and non-recurring credit loss, as well as rail line doubling expenses, Ebitda at Rs 1,285 crore beat the Street estimates. Reported revenues were marginally lower than the estimates. Consequently, net profit at Rs 844 crore (up 10 per cent year-on-year) came close to the Rs 852 crore in consensus estimates.

Realisations got a push from a higher share (38 per cent) of iron ore from Karnataka mines. Higher product and regional premiums also supported realisations, say analysts. Karnataka, having limited ore supplies, still enjoys better realisation than other regions. Going ahead, adequate availability led by improved offtake from Odisha mines, coupled with declining global iron ore prices, is likely to keep a check on realisations for Indian companies. So, analysts don’t rule out some pressure on NMDC’s.

Volume, valuations

However volume growth remains firm and should cushion any downside, says Goutam Chakraborty of Emkay Global. The stock valuations are also attractive. Analysts at Motilal Oswal Securities say while there is some risk to iron ore pricing, at the current market price after adjusting for the cost of works in progress, the valuations at 3.3 times the ration of FY19 enterprise value to Ebitda are compelling. They see a 48 per cent upside to the stock price from the current levels.

There are other triggers as well, which could surprise on the upside. Analysts at ICICI Securities, for instance, expect mining disruption in Odisha to drive up ore prices. The Supreme Court has directed Odisha miners to pay Rs 17,000 crore of levies to resume/restart mining. The brokerage says their study of many of the large and small entities highlight that as the leases were anyway expiring in 2019-20, it doesn’t make sense to pay the hefty fine and resume mining. This needs to be watched, as the payments were to be made by December 2017.