NMDC Q1 results surprise Street

Better than expected results and attractive valuations turn in favour of company

NMDC saw its share price rise  six per cent to Rs 99.95 on Wednesday, after it delivered better-than-expected numbers for quarter ending June. Higher volumes and margins helped the company report a net profit of Rs 1,572 crore, ahead of Street expectations of Rs 1,470 crore. On the back this performance and attractive valuations, analysts have turned positive on the stock. They believe higher production will drive growth and help NMDC limit the pressure on profitability in FY14. At the current price, its stock is trading at seven times its FY14 estimated earnings and three times enterprise value to operating profits, attractive in light of the 27 per cent return on equity (FY13), 6.6 per cent dividend yield and cash of Rs 21,000 crore on the books (53 per cent of its current market capitalisation).

Q1: Better than expected
During the June quarter, NMDC produced 6.9 million tonnes (mt) of iron ore. Though growth in output was flat, sales grew five per cent to 7.3 mt during the quarter. Higher sales volume partly helped offset the pressure on realisation front, which compared to last year’s Rs 4,140 per tonne fell by five per cent to Rs 3,954 per tonne in the June 2013 quarter. Globally, iron ore prices have fallen from about $130 a tonne last year to $120 in March 2013 quarter and further to $110 currently.

However, the market liked the fact that NMDC’s realisations were up compared to Rs 3,889 a tonne for the March quarter. Analysts were expecting a deeper cut in revenues, which came at Rs 2,869 crore (up a per cent) and were better than expectations of Rs 2,675 crore. Similarly, though operating profit margins fell 1,471 basis points to 66.3 per cent on a year-on-year basis, the same were better than Street estimates of 63.9 per cent; and higher than 54.6 per cent in March 2013 quarter.

Outlook
After a tough year, NMDC is expected to report better volumes in FY14 on account of various logistical improvements already undertaken in FY13 in Chhattisgarh, commencement of forward e-auction in Karnataka and rationalisation of prices (particularly lumps) in accordance with domestic market conditions. At the current rate of sales volume, the company should clock sales of about 29 MT, about 10 per cent higher compared to 26.3 mt in FY13.

"We continue to believe that iron ore supply is getting tighter in India, which will improve the pricing power for iron ore fines. We expect NMDC to deliver 10 per cent volume CAGR (annual growth) during FY13-15," said Sanjay Jain of Motilal Oswal Securities in a note.

Higher volumes, at least in the interim, will help the company to tackle the price pressure and thus protect its profits from falling. In FY14, the realisations are expected to drop from about Rs 4,031 per tonne to Rs 3,569 per tonne.

The company has already announced a cut in iron ore lump prices by Rs 200 a tonne to Rs 4,300 per tonne. However, despite that earnings may not drop more than 4-5 per cent in FY14.