Robust prospects fortify NMDC stock; India's steel demand may stay strong

A recent price hike from NMDC has sparked interest in the stock. It is the key player in the iron ore market and its fortunes are tied to steel offtake and prices.

Global commodity markets have seen a rise in iron and steel prices based on two expectations.

One is that global growth excluding China will improve in this calendar year, as inflation is tamed.

The second is the massive stimulus measures in China will help the world’s second-largest economy accelerate growth rates and pull it out of a near-deflationary cycle.

On the domestic front, India’s demand for steel will stay strong if government spending on infrastructure is backed up by a rebound in the realty sector.

NMDC’s FY24 iron-ore production (April-November) stood at 27.3 million tonnes (MT) up 17.1 per cent year-on-year (Y-o-Y) while sales volume grew 24.8 per cent Y-o-Y to 28.1 MT.

In an exchange filing, the PSU stated the price of lump iron ore has been raised by Rs 200-250/tonne to Rs 5,600/tonne, while the price of fines has been increased by Rs 250 per tonne to Rs 4,910 per tonne.

NMDC’s current prices are still at a steep 55-60 per cent discount to international ore prices.

Historically, NMDC fines have usually been at around a 40-45 per cent discount so there’s room for further price hikes.

The demand outlook remains steady with Indian domestic steel demand expected to maintain CAGR of 7-8 per cent due to the policy focus on infrastructure.

The utilisation of full capacity at NMDC Steel (which was spun off but NMDC holds 60.8 per cent stake) could boost sales volume further.

NMDC could hit production of 46 MT of ore in FY24. In FY25, NMDC may surpass 50 MT due to capacity expansion and strong domestic demand. It has an aggressive capex plan which may expand the capacity to 67 MT by FY26-27E from the current 51.8 MT.

NMDC has earmarked Rs 2,000 crore capex for FY24 and intends to spend more in FY25 (Rs 1,000 crore of capex was incurred in H1FY24).

Tier-I steel manufacturers are also expanding capacities which implies strong stable long-term demand and growth opportunities. In most scenarios, NMDC is very well placed, due to demand, capacity additions, and improved ore prices.

One key risk is competition with over 110 captive iron ore blocks auctioned since FY16. Of these, some 30 mines are already operational. As the remaining captive mines become operational, it would increase the supply of iron ore, thus intensifying competition for NMDC.

However, taking aggregate steel capacity plus capacity expansions into consideration, iron ore demand could climb to above 400 MTPA by FY30. Hence, even if NMDC expands capacity beyond 100 MT by FY30 from the current 52 MT, demand still exceeds supply.

The company is also exploring gold mining prospects in Australia and looking at lithium mining. It hopes to generate around 15 per cent of FY28 revenues from non-ferrous with around 10 per cent coming from its international portfolio. The stock has jumped however and it is quite close to target valuations of Rs 220-230 from various analysts.

So the upside may be built into the price.