NMDC has scope for value-unlocking for investors with demerger plan

Steel plant demerger, improved return ratios for mining business, high dividend yield key positives

NMDC reported a weak set of numbers for the June quarter (Q1) on Thursday evening, but news of the demerger of its steel plant boosted investor sentiment. NMDC’s share price jumped over 13 per cent intraday, before closing 12 per cent up on Friday. The demerger, analysts say, should lead to value-unlocking for investors.

NMDC, the country’s largest iron ore producer, has set up a 3-million tonne per annum (MTPA) steel plant in Chhattisgarh. Though NMDC’s investment in the steel plant was aimed at driving growth and earnings, with the plant adding value to its captive iron ore, the Street was not giving much value as it awaited the plant’s commissioning, say analysts. The stock was tracking only iron ore sales and pricing prospects.

The book value of the steel plant stands at Rs 15,000 crore (Rs 50 per share of NMDC), highlighted analysts at Motilal Oswal Financial Services.

Creating a separately listed firm eventually with a shareholding akin to NMDC shall be value accretive to its minority shareholders, say analysts at ICICI Securities. 
 

Analysts expect all incremental capex for the steel plant to be self-funded by the demerged entity. The mining entity, thereby, should see improved return ratios, leading to higher dividends. But, if the plant is sold/divested, it may weigh on long-term gains of the shareholders, who have waited many years for NMDC’s rise in the steel value-chain to fructify.

 

 

Meanwhile, the company’s business prospects have improved significantly. During Q1, NMDC had seen its revenues from operations decline 39 per cent year-on-year (YoY). 
 

Lower steel production in the country impacted by the lockdown, led to a 27 per cent YoY decline in NMDC’s sales volume, while average domestic steel realisations declined 18 per cent, thereby putting pressure on iron ore prices. NMDC’s operating profit was down 46 per cent and pre-tax profit by 49 per cent YoY in Q1.

Thereafter, the strong recovery in steel demand from China and iron ore supply disruption in Brazil have led to a higher iron ore price. The per tonne international iron ore price has rebounded from the low of around $80 in March to over $120. The firm, which continued to see price cuts during the lockdown to push inventory, has raised its ore price by Rs 700 a tonne after Q1. There is further scope for price hikes, feel analysts, and better realisations will boost its Ebitda. Reported Q1FY21 per tonne profitability of Rs 1,200 will likely get rebased to Rs 2,200-2,300 over the next three quarters, say analysts at ICICI Securities.