Realisations boost for NMDC

Firm was able to hike prices for the third straight month in Jan, despite note ban concerns

The uptrend in iron ore prices is positive for India's largest iron ore producer NMDC. The company was able to hike prices in January for the third consecutive month, despite concerns of the Street on demonetisation. This helped the stock gain over six per cent since company's announcement on January 3.

The company has set the price of iron ore fines at Rs 2,225 per wet metric tonne (WMT) and the same for lumps at Rs 1,985 per WMT, a rise of 6-7 per cent over December prices. Earlier in 2016, while international iron ore prices after bottoming out at start of the year started to look up, NMDC also took a few price hikes in March and April before some pressure was felt in subsequent months. Nevertheless the uptrend has resumed from October onwards. The company is not only benefitting from improving realisations quarter after quarter but also from improving volumes.

During first half of FY17, it has seen its sales increase 20 per cent year-on-year. While domestic sales at 14.52 MT have increased 11 per cent y-o-y it is the exports that have provided further boost. The improving international prices bode well as company was able to export 1.27 MT of its production in the first half against nil last year. The relaxation in the railway freight for export and reduction in duties has led to exports becoming remunerative again as international ore prices are on the rise.

What's more, in the domestic market demand remains strong despite demonetisation. The major steel producers such as JSW Steel who are customers of NMDC have a superior product mix and have increased exports to compensate for any softness. The regular steel price hikes being taken by steel makers bode well for raw material suppliers such as NMDC. Analysts at Religare Institutional Equities say that upcoming steel price hikes augur well for iron ore miners, giving them room to raise prices especially when some Odisha miners exhaust production limits and also prices of iron ore fines are at a discount of 25-30 per cent to landed prices. This means more scope for iron ore price hikes.

Analysts at Edelweiss have already revised FY17/18 prices by 18 and 14 per cent respectively. The good dividend yield adds to returns that can accrue to investors. The company plans to sell stakes in the planned steel capacities which is likely to garner strong valuations and can provide additional triggers. However, since government holds 75 per cent stake in the company, any stake sale plans could act as a dampener in the near to medium term.