NMDC: Weak realisations to keep the stock price down

Though sales volumes have picked up and stock valuations are attractive, iron ore prices are sliding

NMDC saw its iron ore sales volumes growing strong 5.8 per cent year-on-year (y-o-y) for the June quarter to 7.26 million tonnes (mt), aided primarily by sales in Karnataka. However, along with the volume numbers, last week the company also announced price cuts of lumps and ores by Rs 200 a tonne and Rs 100 a tonne (a 4.3 per cent and 3.8 per cent decline), respectively. The frequent price cuts have been to prevent the inventory build-up due to weak demand and increase in production. Steel's demand and pricing have been feeling the heat of the economic slowdown for some time now.

It is against this backdrop that the stock price of NMDC has declined from its 52-week high of Rs 201 on August 29, 2012 to its 52-week low of Rs 99 on June25, 2013. At current market price of Rs 104.70, the valuations are very attractive and some analysts have come out with a 'buy' rating on the stock, significant upside may come only when demand and pricing scenario improves, which is unlikely to happen soon.

Realisations to be subdued
Iron ore spot prices have continued to decline from $156-157 (about Rs 9,360 at Rs 60 to a dollar) a tonne in January this year to $112-113 (Rs 6,780) levels in June. Currently, they are a tad higher at $122 (Rs 7,320) levels. Steel demand continues to remain weak due to slowdown in the developed world and slowing Chinese demand. In India, demand has continued to weaken since the second half of FY13. Thus, while prices of iron ore fines have seen price cuts of 6.7 per cent, those of lumps are down 27.5 per cent since October 2012. Going forward, too, lump prices will decline further by Rs 200 a tonne in FY14, given the weak demand scenario, says Bhavesh Chauhan at Angel Broking.

Volumes to give respite
NMDC is undergoing production ramp-ups at its mines in both Karnataka and Chhattisgarh region. Karnataka's production during the June quarter saw a growth of 4.8 per cent to 2.17 mt. In Chhattisgarh, too, Bailadila deposits at 11B mines are to add around 7 mt annually to its existing production capacities shortly. The production ramp-ups are expected to push volumes for the company. Giriraj Daga at Nirmal Bang estimates eight per cent and seven per cent y-o-y growth in iron ore volume in FY14 and FY15 to 28 mt and 30 mt, respectively. However, he has lowered his realisation and earnings per share estimates for FY13 and FY14.

Outlook
While the company will benefit from higher volumes, lower realisations are likely to hurt revenue growth. For the June quarter, Abhisar Jain at Centrum Broking expects revenue to decline by five per cent, y-o-y, on the back of lower realisations in spite of the company achieving sales volumes of 7.3 mt (including exports of around 0.5 mt during the quarter). For the full year, the analyst's estimates generally indicate subdued earnings growth, which will keep a tab on near-term upside for the stock.

What, though, provides comfort is the attractive valuations - 6.5 times one-year forward earnings and dividend yield of 6.7 per cent. NMDC, which is debt-free, has cash in the books worth Rs 21,025 crore at end-March 2013 equivalent to Rs 53 per share. Annually, it is generating profits in excess of Rs 6,000 crore, aided by its low-cost operations. This has enabled it to hike dividends in the last three years. Given the dividend of Rs 7 a share for FY13 (against Rs 4.50 per share for FY12), Daga says he expects a similar trend in the coming years, the downside for the stock could be limited. The consensus one-year target price, according to Bloomberg data, is Rs 143.78.

Long-term investors could consider the stock from a two-to-three years' perspective. The gains could come sooner only if the company surprises on the volume front or is able to fast-track its plans to move up the value chain.