Falling iron prices play spoilsport for NMDC

As revenues and profitability remain robust, lower international iron ore prices is an overhang

NMDC continues to witness strong volume growth with improving realisations driving its quarterly performance. During the March quarter (Q4), the company achieved volumes of 9.8 million tonnes (MT) which were much better than 8.8 MT in the year-ago quarter. Similarly, per tonne realisations at Rs 2,841 also improved from Rs 2,403 in the December quarter and Rs 1,658 seen in the year-ago quarter.

Thus, the company saw an 88 per cent year-on-year (y-o-y) and 15 per cent sequential rise in sales to Rs 2,872 crore. This was also ahead of Street expectations as Bloomberg consensus estimates pegged revenues at Rs 2,694 crore.

Operating profit at Rs 1,429 crore also improved over the year-ago quarter and was ahead of the Rs 1,415-crore estimate pegged by analysts. But, rising employee costs (provisioning for gratuity) led to muted operating profit show on a sequential basis. 

The net profit figure was, however, a disappointment as the company reported a number of Rs 511 crore, lower than Rs 595 crore in Q3 and just 11.5 per cent growth over the year-ago quarter. This was due to one-off charges as the company has provisioned for mine-closure charges and service tax on royalty, among others. The concern, however, stems from the fact that the company had made provisions in Q3 as well. Analysts at Motilal Oswal Securities say NMDC had recognised charges of Rs 390 crore on account of service tax on royalty, track-laying charges to the railways, mine closure and bad debts in Q3, which were one-off in nature. These expenses, however, have continued in Q4 (Rs 450 crore) and till the time there is clarity on them, they have kept rating for NMDC under review.

The bigger concern is decline in international iron ore prices, which has kept the Street cautious. Though after four successive hikes in November-March the company has continued to maintain prices for its output in April and May, but with decline in international prices, it may have to rethink on its domestic pricing. Analysts at Credit Suisse say all major Odisha miners cut prices by Rs 150-300 per tonne this month and they believe NMDC may follow suit. Global ore prices have corrected sharply from $95 a tonne in February to $61 a tonne now. This also increases risks on rising imports, which may also have a bearing on NMDC’s exports of low-grade ore.

Thus, the Street’s concerns will remain alleviated in the near-term. The stock prices have already corrected from the highs of Rs 152.50 at the start of March to Rs 116-levels now.