 "NMDC: Volume gains, valuations provide downside support")
Strong growth in sales volumes of iron ore and higher realisations helped NMDC post better-than-expected numbers for the quarter ended March. This, in turn, led to a gain of 2.4 per cent in its share price to Rs 119.4 today. Analysts remain positive on NMDC’s prospects as they believe higher production will drive growth and help the company achieve better profitability in FY14 as well. Apart from growth visibility, stock valuations, too, are attractive at 6.7 times its FY14 estimated earnings and three times enterprise value to operating profits, given good return ratios (25 per cent return on equity), about six per cent dividend yield (based on FY14 estimates) and its leading position in the domestic iron-ore industry.
Q4: Influenced by prior period expenses
During the quarter ended March, NMDC sold about 8.2 million tonnes (mt) of iron ore, which is 27 per cent higher than the year-ago period and the highest quarterly sales in the last two years. Higher sales volumes were helped by a spurt in export volumes to 870,000 tonnes, compared with 730,000 tonnes in the first nine months of FY13. Though realisations were lower by three per cent compared to the year-ago period, they were up one per cent at Rs 3,889 a tonne, compared with the December 2012 quarter. Clearly, higher volume was the biggest contributor to the 23.5 per cent year-on-year growth in revenues at Rs 3,202 crore.
However, operating profits fell 11.4 per cent year-on-year, largely as a result of prior period expenses of about Rs 400 crore. Besides, an extraordinary expense of Rs 68.6 crore was provided during the quarter. After adjusting these two transactions, operating profit was up nine per cent at Rs 2,218 crore. A 69 per cent jump in operating expenses restricted profit growth. Cost increases were largely due to freight and selling expenses, which jumped from almost zero to Rs 393 crore on account for higher export sales. This also explains a fall in net profit by 11 per cent to Rs 1,465 crore. However, if one adjusts these extraordinary transactions, net profit was still higher by five per cent at about Rs 1,726 crore on a year-on-year basis.
Outlook
In FY14 as well, the main driver of growth will be volumes. The management has estimated sales volumes of about 28-29 mt in the current year, which looks achievable, given the 8 mt volumes in the March quarter (translates to 32-33 mt on an annualised basis). Even if NMDC achieves 29 mt in FY14, it should result in a revenue growth of about 10 per cent. In terms of the profitability, though, a lot will depend on the pricing. Analysts are expecting marginal pressure on realisation because of higher supply and lower demand in the user industry. In FY13, average iron ore realisation came in at around $75 a tonne. In the event realisations fall sharply, it could impact earnings in FY14. For now, FY14 earnings per share estimates range from Rs 14 to Rs 18. Overall, NMDC would still generate good cash flows, which will add to its cash and bank balance of Rs 21,026 crore (as on March 2013) and support its share prices and dividend payouts.
Q4: Influenced by prior period expenses
During the quarter ended March, NMDC sold about 8.2 million tonnes (mt) of iron ore, which is 27 per cent higher than the year-ago period and the highest quarterly sales in the last two years. Higher sales volumes were helped by a spurt in export volumes to 870,000 tonnes, compared with 730,000 tonnes in the first nine months of FY13. Though realisations were lower by three per cent compared to the year-ago period, they were up one per cent at Rs 3,889 a tonne, compared with the December 2012 quarter. Clearly, higher volume was the biggest contributor to the 23.5 per cent year-on-year growth in revenues at Rs 3,202 crore.
However, operating profits fell 11.4 per cent year-on-year, largely as a result of prior period expenses of about Rs 400 crore. Besides, an extraordinary expense of Rs 68.6 crore was provided during the quarter. After adjusting these two transactions, operating profit was up nine per cent at Rs 2,218 crore. A 69 per cent jump in operating expenses restricted profit growth. Cost increases were largely due to freight and selling expenses, which jumped from almost zero to Rs 393 crore on account for higher export sales. This also explains a fall in net profit by 11 per cent to Rs 1,465 crore. However, if one adjusts these extraordinary transactions, net profit was still higher by five per cent at about Rs 1,726 crore on a year-on-year basis.
Outlook
In FY14 as well, the main driver of growth will be volumes. The management has estimated sales volumes of about 28-29 mt in the current year, which looks achievable, given the 8 mt volumes in the March quarter (translates to 32-33 mt on an annualised basis). Even if NMDC achieves 29 mt in FY14, it should result in a revenue growth of about 10 per cent. In terms of the profitability, though, a lot will depend on the pricing. Analysts are expecting marginal pressure on realisation because of higher supply and lower demand in the user industry. In FY13, average iron ore realisation came in at around $75 a tonne. In the event realisations fall sharply, it could impact earnings in FY14. For now, FY14 earnings per share estimates range from Rs 14 to Rs 18. Overall, NMDC would still generate good cash flows, which will add to its cash and bank balance of Rs 21,026 crore (as on March 2013) and support its share prices and dividend payouts.