Demand boosts NMDC's volumes, realisations

Healthy demand, production ramp-up to keep volumes & realisations firm and drive growth

In the recent market rally, NMDC has been one of the major gainers, scaling its 52-week high of Rs 196.15 last week. The rally has been fuelled by the company’s improving prospects. Volumes are growing at a steady pace, aided by demand growth and production ramp-up. While an economic revival is expected to boost the company’s steel demand, mining bottlenecks are keeping a check on iron-ore availability, benefiting miners such as NMDC.

After Karnataka and Goa saw limited production due to mining bans, the recent ban on mining in Odisha has further hit the availability of iron ore in India.

NMDC is expected to benefit from these mining bans, with an increase in volumes and prices likely. In a note, Edelweiss analysts said though logistics and mining constraints would prevent NMDC from fully meeting the shortfall, two-three million tonnes per annum (mtpa) of additional volumes and a 10 per cent rise in prices for a limited period were possible.

At a time when international iron ore prices are under pressure, better realisations bode well for NMDC. Global iron ore prices have fallen below $100 a tonne and the rupee, which was cushioning domestic prices, has appreciated.

For June, the company has increased the prices of iron ore fines and lumps 8.6 per cent and seven per cent, respectively. This bodes well for NMDC’s realisations which, at Rs 4,085 a tonne in the March quarter, are up 6.3 per cent year-on-year and 7.3 per cent sequentially. NMDC’s earnings before interest, tax, depreciation and amortisation (Ebitda) have been increasing — at Rs 2,627 a tonne, it was up 23.5 per cent year-on-year in the March quarter.

Apart from the temporary spurt in demand from a few regions, owing to the mining ban, NMDC is already seeing regular growth in volumes due to continuing production ramp-ups and a decline in evacuation bottlenecks at its Chhattisgarh and Karnataka mines. In FY14, production increased 11 per cent to 30.18 mt, while offtake surged 16.8 per cent. The momentum continued in April and May, with 22 per cent and 11 per cent year-on-year rise in sales, respectively.

Goutam Chakraborty at Emkay feels NMDC’s production target of 32-35 mt production in FY15 should be easy to meet.

Capacity additions in the steel sector will add to iron-ore demand and support prices in India. Of the 28-mtpa steel capacities being added in FY14-FY16, there are no captive iron ore supplies for seven mtpa, a positive for NMDC. Also, the company has a strong balance sheet and is available at a good dividend yield of five-six per cent. In this backdrop, even after the strong run-up, the stock is reasonably priced at enterprise value/Ebitda of 5.3 times the FY15 and 8.9 times the FY16 estimate, and can be considered by medium-term investors.