NMDC: Analysts see improving volumes ahead as Karnataka issues resolve

Analysts see improving volumes, earnings growth ahead as Karnataka pricing issues resolve

The NMDC stock has continued trending down on the bourses with declining international iron ore prices over the last few months. 

However, there seems to be some respite ahead for the company as well as investors.

The ex-China iron ore prices, which stood at over $78 a tonne in early March, had declined to less than $64 a tonne by April and have remained range-bound thereafter. 

The declining international prices meant that NMDC also had to adjust prices of its produce. 

The lower Karnataka sales volumes made matters worse for NMDC, with steel manufacturers — such as JSW Steel — having access to ports, resorting to higher imports. 

The impact was visible on NMDC’s June quarter (Q1) performance. 

While the average per tonne realisation declined by three-four per cent sequentially, volumes fell sharply from 10.5 million tonne (MT) in the March quarter, to 6.8 MT in June quarter. 

The volume in the year-ago quarter was 9.2 MT. 

The uncompetitive pricing in Karnataka and a fall in global iron ore prices have both impacted the company’s iron ore volumes, say analysts. 

But given that NMDC has taken corrective price actions, it has led to some sequential improvement in July. 

Analysts at ICICI Securities said what excites is NMDC suitably resolving the issue of low off-take by JSW Steel from Karnataka, by acknowledging the change in pricing that is happening globally. 

With the resolution of pricing issues, analysts remain positive on NMDC’s prospects. 

The rising steel production in India is also helping demand for iron ore. 

The ex-China iron ore prices, too, have improved to $68 a tonne-levels of late.

Meanwhile, as the company’s investments in its steel plant is expected to yield results from FY21, the pallet plant ramp-up should contribute to earnings in FY19 itself. 

Analysts at Edelweiss believe that NMDC’s pellet plant, which is now stabilising, will turn in a profit by the third quarter of the current fiscal year, contributing an additional Rs 1,500–2,000 per tonne at current pellet prices. 

Pencilling in the above developments, analysts at Motilal Oswal Securities expect NMDC’s iron ore volumes to grow at a compound annual growth rate of 5-6 per cent over the next four-five years. 

Despite factoring in lower iron ore margins from the first quarter of this fiscal year, they expect Ebitda growth of 13 per cent annually over FY18-22.