NMDC still not out of the woods

Although high dividend yield will provide downside support, pressure on iron ore realisation to continue

NMDC has seen some reversal in fortunes on the bourses. The stock, which had almost halved in a year to lows of Rs 75.20 last week, has gained 23 per cent since to Rs 92.10. This has been led by a 950 per cent dividend announcement by NMDC after the December 2015 quarter results and some rebound in global iron ore prices.

Dividend is a strong enough trigger for the rebound in stock prices, as the investors will be getting the first interim dividend of Rs 9.50 for every share of face value Rs 1 held by them. This translates into a dividend yield of 10.3 per cent at the current price.

The optimism has got further boost from international iron ore prices. The per-tonne price of 62 per cent iron ore grade for exports to China, which had fallen from $65 levels to sub-$40 in a year, now stands at $47. The optimism is valid as NMDC’s realisations have been under pressure. The company’s blended realisation at Rs 2,101 a tonne during the December 2015 quarter were less than half the levels in the year-ago quarter (Rs 4,229 a tonne). The company’s iron ore price since October 2014 have been reduced by almost Rs 2,200 a tonne for lumps and Rs 1,600 a tonne for fines and during the month of February 2016 stand at Rs 1,800 per wet metric tonne (WMT) for lumps and Rs 1,560 per WMT for fines.

The rebound in prices could help NMDC maintain  sales prices during January and February, after having cut prices of lumps and fines by Rs 1,000 a tonne and Rs 100 a tonne during the December 2015 quarter itself, but analysts don’t expect much upside.

Analysts at Edelweiss in their note dated February 18 say domestic iron ore prices are expected to remain under pressure due to the bleak international price outlook and increased domestic competition, with gradual re-start of closed mines. They have reduced FY16 and FY17 estimates for prices of lumps by six per cent and 35 per cent, respectively, and expect prices of lumps in FY18 to stay at the same levels seen in FY17. Their target price of Rs 88 indicates limited upside for NMDC stock from here on. Analysts at IIFL, too, have reduced price estimates for NMDC’s iron ore over the next two years and have a target price of Rs 85. They say the company’s good dividend yield will provide support on the downside.