NMDC: Strong rebound seen in profitability in March quarter and FY19

NMDC's decision to cut iron ore prices by 3-4 per cent or Rs 100 a tonne from March 1 may have weighed on street sentiment, but analysts say the company's prospects remain healthy. They say, some price cuts were expected given that NMDC had consistently raised prices of iron ore lumps and fines, taking the total increase to 34 per cent and 38 per cent, respectively since November 2017.

The move has also surprised some on the street given that iron ore prices ex-china had touched 10 month highs of $79.95 a tonne at the end of February. NMDC's price hikes during November-February had been supported by rising international iron ore prices from sub-$60 a tonne, as well as mining disruptions in Odisha. With the restart of some mines in Odisha after mid-February, some price adjustment was anticipated.

The bigger gain, as the street sees it as, will come in the form of higher volumes. NMDC's production at 24.3 million tonne (MT) during first nine months of FY18 was up marginal by three per cent, while dispatches at 25.5 MT were down a per cent, over the year ago period. Lower prices should come handy in achieving its sales target of 36 MT for FY18, as domestic demand remains supportive looking at rising steel production. CRISIL, in its India outlook for 2018, on Monday said that it is particularly positive on the steel sector.
 

Although the past few days have seen worries over trade protection measures proposed by the US, analysts believe that the impact is unlikely to be meaningful in the medium term. In March, in fact, steel players have hiked prices by Rs 1,000 a tonne, taking cumulative steel price increases to 11 per cent since December 2017. Firm steel prices should prove supportive for iron ore.

Meanwhile, NMDC also announced the commissioning of its 220KV main power receiving substation on March 1, which is part of its plan to integrate forward into steel making. On this front, analysts at Edelweiss Securities expect NMDC's pellet plant to commence operations this month, and contribute to earnings from June 2018 quarter. They expect incremental operating profit of Rs 4.0-4.5 billion from this pellet plant. As its steel plant goes on steam in around end-FY19, expect bigger gains. Motilal Oswal Securities, post December quarter results, had also said that NMDC's stock valuations are ignoring value of steel plant.

For now, most analysts expect a strong rebound in profitability for NMDC in March'18 quarter too. Analysts at Kotak Institutional Equities said that NMDC will report strong improvement in 4QFY18 earnings on the back of 19-22 per cent increase in iron ore prices.

Given target prices of analysts ranging Rs 151-215, any correction is an opportunities to accumulate the stock trading at Rs 123 levels.