NMDC: Value in the mine

Favourable market for steel and the ability to pass on the costs are positives

A supplier of iron ore to steel producers, NMDC appears well-placed to benefit from favourable market conditions for steel and its raw materials.

Solid demand for iron ore, healthy revenue growth over the past one year and good operating margins are positives for the company.

At the current market price of ₹94, the stock is attractively valued at about eight times its trailing 12-month earnings, lower than the average that it traded at over the past three years (14 times). The stock has fallen by over 25 per cent in the last three months. At this level, it is a good buying opportunity for medium-risk investors with a long-term horizon.

NMDC’s dividend yield has been healthy, at about 4-5 per cent over the past few years, making it attractive for investors.

Strong demand

NMDC derives a significant portion of its revenue from the sale of iron ore. It has quality iron ore mines in Karnataka and Chhattisgarh and is one of the largest players in the industry with a market share of about 25 per cent in India. It produced about 35 million tonnes of iron ore per annum in FY-18, with a capacity utilisation rate of over 80 per cent. The demand for iron ore is directly linked to the performance of the steel sector. Indian steel demand is expected to accelerate gradually, driven by public investment and growth in the automobile and construction sectors. The overall growth in steel consumption in India for FY18 stood at a healthy 7.8 per cent. According to the World Steel Association, India produced 79.6 million tonnes of crude steel in the first nine months of 2018, which is a 6.1 per cent growth compared with the same period a year ago.

Also, as per the National Steel Policy formulated during FY 2017-18, the target for crude steel production capacity is 300 million tonnes by 2030. Domestic production is now just above 100 million tonnes in 2017.

NMDC proposes to augment its production capacity of iron ore to 67 million tonnes by 2021-22. It has also embarked on value-added projects by setting up pelletisation plants and a 3 mtpa integrated steel plant, expected to be commissioned by mid-2019.

The global average traded price of iron ore (62 per cent Fe CFR China) in 2018 so far was $66.5 per tonne. This average has been the highest over the last four to five years. Prices of iron ore are expected to hover in the $66-70 per tonne range.

Note that NMDC mostly fixes the price for its output on a monthly basis, based on global prices and demand-supply in India. It has been able to pass on costs consistently. Over the past two years, the company has increased the prices of lumps by almost 70 per cent to ₹3,550 per tonne in line with the global prices.

Good growth

The company was profitable even when the steel industry was going through a tough patch in FY16. It has achieved record production of 35.5 million tonnes and sales of about 36 million tonnes in FY-18 — its highest-ever. NMDC’s operating margins are also high. For the six months of FY-19, the operating profit margins stood at nearly 60 per cent.

However, due to production loss in the first half of FY-19, the company reported revenues of ₹4,859 crore, down 7 per cent Y-o-Y. However, the operating profit for the same period was flat Y-o-Y, at ₹2,938 crore, on account of increase in realisations. The operating profit per tonne was around ₹2,179, against ₹1,679 a year ago. For the same period, the company reported net profit of ₹1,611 crore, down 11 per cent Y-o-Y. That said, volume growth is expected to stabilise going ahead, with increase in demand.

 

Closure of Donimalai mines

NMDC has suspended operations in one of its mines in Donimalai, Karnataka, as the State Government renewed the mine’s licence on condition that an 80 per cent premium be imposed on iron ore sales from the mine. The company’s decision to halt production in the mines until the issue is resolved would affect production volumes for the year.

That said, it would trigger a rise in iron ore prices due to the supply shortage, which is expected to compensate for the production loss in the coming quarters. There have reportedly been talks between NMDC’s executives and the government in this regard, though a resolution has not yet been achieved.

Channel check with end-users indicate that the issue will be resolved soon.

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