NMDC misses profit expectations

Profit growth may seem muted, but it was ahead of estimates if one-off transactions are excluded

Aided by strong volume growth and realisations, NMDC posted a strong operating performance for the December quarter. However, profits were weighed down by one-offs and thus missed expectations and disappointed investors. The stock lost about five per cent on Tuesday to close at Rs 138.40.

Rising iron ore prices and improved ore demand has helped NMDC’s performance rebound sharply over the past few quarters. During the December quarter, too, while NMDC saw its production rise 28 per cent year-on-year (y-o-y) to 9.71 million tonne (mt), sales grew 25 per cent to 10.06 mt. It is not only domestic demand, but rising exports that bode well for the company. In the December quarter, NMDC’s exports jumped 49 per cent y-o-y to 0.78 mt, while domestic sales grew 24 per cent y-o-y to 9.27 mt. Low-grade iron ore exports got a twin boost, and could see further gains. One, the government reduced export duty at the start of FY17; second, international iron ore prices have been on an uptrend, thus pushing up domestic prices. These have also provided a boost to NMDC’s profitability. The company’s per tonne realisation in the domestic business at Rs 2,403 was higher than Rs 2,054 in the year-ago quarter and Rs 2,093 in the September quarter. Thus, revenue at Rs 2,498 crore was up 65 per cent y-o-y and ahead of Rs 2,393 crore, as indicated by a Bloomberg poll of analysts.

But, NMDC utilised some of the gains (about Rs 597 crore) towards payment of service tax on royalty, additional liability towards some mine closures, payment for railway line doubling and also provided for bad debt. About two-thirds of total one-offs were included in operating expenses and hence impacted the operating profit, while the rest were under exceptional items.

Thus, reported Ebitda at Rs 1,026 crore, though up more than threefold, came lower than estimates of Rs 1,249 crore. Adjusted for one-offs, analysts peg Ebitda at Rs 1,423 crore. In fact, NMDC’s Ebitda per tonne at Rs 1,415 was highest in the past five quarters.  As NMDC utilised some of its cash kitty for buyback of shares recently, interest income fell sharply by 77 per cent y-o-y to Rs 81 crore and other income declined 43 per cent y-o-y. Thus, reported operating profit at Rs 595 crore (up 41 per cent) came lower than estimates of Rs 994 crore; adjusted for one-offs, it was Rs 1,031 crore.

NMDC should continue benefiting from rising volumes and realisation. Recent price hikes (35-40 per cent since October; Rs 125 a tonne in January) will continue to fuel earnings as demand for ore, on rising steel production, also remains firm. Analysts at Motilal Oswal Securities estimate Ebitda to grow 33 per cent annually over FY16-18.