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The NMDC stock has been on a downward trajectory for some time, underperforming the BSE Sensex. This has largely been due to declining iron ore volumes.
The company’s ore sales, at 5.9 million tonnes (mt) and 5.3 mt during the September and December 2012 quarters, came much lower than the 7.6 mt and 6.4 mt during the same period last year, respectively. While incessant rain was one reason for the production decline, demand has also been weak. Also, NMDC’s premium pricing impacted the offtake. The government’s offer for sale (OFS) of part of its stake in the company during December added to the problems for its shares.
However, the outlook for the company and the stock is now improving. Although analysts estimate the company might end FY2013 with production volumes at 26 mt, a decline of 4.8 per cent over the 27.5 mt in FY12, this is likely to improve in FY14, driven by completion of capacity expansions and fine-tuning of pricing policy. The company has also shown its intent to hasten plans for setting up a steel plant. The three-mt plant, likely to be a joint venture with a steel producer, can help raise some funds, given that the latter will have to pay for buying the stake. Although weak iron ore prices might take away some gains, overall, the above developments would be positive for the company. Most analysts (30 of 34 polled by Bloomberg) are positive on the stock. The consensus target price for the stock, now trading at Rs 138, stands at Rs 188.63, according to Bloomberg, indicating an upside potential of 36 per cent.
Improving production outlook
NMDC is the largest iron ore mining company in India, with reserves of 1.3 billion tonnes of rich ore (over 65 per cent iron content). It has planned significant ramp-up in production capacity. Over the next two years, it is expanding its annual mining capacity from the current 32 mt to 48 mt. While some capacity expansions had seen delay during FY13, these are likely to get completed in FY14. For instance, capacities at its Bailadila deposit, at the 11B mines, are to be completed by June, leading to addition of seven mt to its existing capacity of 21-22 mt in Chhattisgarh.
Production in Karnataka is also likely to get a boost, from the expansions at the Kumaraswamy mines. These would reach seven mt capacity by November, from the current two mt. The Supreme Court had allowed NMDC to produce 12 mt annually after its ban on production in the state but the company has achieved only seven to eight mt. Expansion at Kumaraswamy will help fill the gap in production from the state. The ramp-up could be faster, feel analysts such as Giriraj Daga at Nirmal Bang, if the mechanism of an advance e-auction is followed in the state. This would help it accurately measure the demand from users.
During FY14, analysts see NMDC producing 29 mt of iron ore, compared with 26 mt in FY13. This could get further boosted by four to five mt if Essar’s slurry pipeline resumes operations.
Price fall impact
Recently, NMDC had cut the price of ore lumps by 2.2 per cent for March to Rs 4,950 a tonne, and kept the price of fines steady at Rs 2,610 a tonne (blended realisations for the fourth quarter are estimated at Rs 3,625 a tonne). The reasons can be attributed to the premium over other producers, mainly in Odisha, slower offtake and inventory of around 1.7 mt of lumps.
Analysts at Emkay Global believe the cut in prices should help NMDC report better sales volume. During January and February, it sold 5.1 mt. Analysts estimate the March quarter sales at 7.5-8 mt, visibly higher than the 5.3 mt in the December 2012 quarter.
This improvement in the performance from the March quarter onwards should change the sentiments of investors. Even as analysts are factoring in lower ore prices and, hence, have cut their realisation estimates for NMDC, they are positive on the stock due to better volume outlook and attractive valuations. Analysts at Emkay Global observe, “Even after adjusting for prices for FY14, at a current market price of Rs 135, the valuation remains attractive at 7.8 times the FY14 EPS (earnings per share) and four times the FY14 EV/Ebitda (enterprise value to operating earnings).”
