Stock Fundamentals

NMDC: Feeling the heat - Hold

Satya Sontanam | Updated on September 22, 2019 Published on September 22, 2019

If company-specific issues are resolved favourably, long-term prospects will be good

The stock of NMDC, the country’s largest iron ore producer, has fallen by about 7 per cent from our last ‘buy’ call in mid-December 2018. The fall has been in tandem with the sell-off across the metal and mining space, in the wake of trade tensions between the US and China. For NMDC, in particular, the shut-down of its Donimalai mines at Bellary, post the Karnataka government imposing conditions for extension of the mining lease, has been an added dampener. Given that the matter is pending before the Mines Tribunal, the stock could remain under pressure in the near term. The overall slowdown in the steel sector only accentuates the problem.

That said, while NMDC is likely to feel the heat in the next one year, long-term fundamentals and prospects remain intact. Hence, investors with a long three- to five-year horizon can hold the stock. After a notable fall over the past nine months, the downside could be limited hereon, with most of the negatives priced in the stock. A favourable order leading to the opening up of the Donimalai mines can be a key positive for the stock, though restarting operations could take a while.

 

 

 

At the current price of ₹85, a multi-year low, the stock trades at about six times its trailing 12-month earnings, against its three-year historical average of 13 times. Good dividend yields, zero debt, healthy margins and strong cash flows should hold the company in good stead over the long run.

Uncertainties exist

NMDC, a navratna Central Public Sector Enterprise (CPSE) has production capacity of 44 million tonnes of iron ore per annum. The company operates open cast mines at Kirandul (three mines) and Bacheli (two mines) in Bailadila sector of Dantewada district in Chhattisgarh State, and at Donimalai (two mines) in the Bellary district of Karnataka State.

On November 2, 2018, the Karnataka government imposed a premium of 80 per cent of the sale value of the ore extracted as premium, to extend the mining lease. Challenging this, NMDC filed a petition in the Karnataka High Court; the matter is still to be heard. Even if the judgment goes in favour of NMDC, commencing mining operations is expected to take considerable time.

Another key overhang on the company is the uncertainty over two mines in Chhattisgarh, in the light of the ongoing skirmish at the Donimali mines. The lease on the Chhattisgarh mines is due to expire in March 2020. These mines contribute nearly 65 per cent of NMDC’s output. Hence, any setback in production can affect the company’s sales.

 

 

 

Coupled with the overall slowdown in the steel sector, company-specific issues have kept NMDC investors on tenterhooks. To ward off the threat from steel players bidding for captive iron ore mines, NMDC is looking at forward integration into steel-making to utilise its iron ore resources. The operations of the three-million tonne steel plant, set up by the company, is slated to commence in the beginning of FY21. While, over the long run, this can pay off, in the near term, the weak steel cycle can play spoilsport.

Healthy fundamentals

One of the key positives for all PSU stocks, including NMDC, has been the strong dividend payouts over the years. NMDC has given a dividend yield of about 5 per cent, during the period.

Also, the company’s operating margins have been around 55 per cent in the last few years. Iron ore prices depend mostly on the demand-supply factors in a particular state.

NMDC generally fixes the price for its output on a monthly basis, based on global prices and demand-supply in India. It has been able to pass on costs consistently to customers, aiding margins.

The company has been able to maintain healthy cash flows. For FY19, the company has generated operating cash flows of about ₹4,000 crore.

NMDC’s strong fundamentals will help it benefit from a turnaround in the sector over the medium term. Thanks to the government’s initiatives — such as Make-in-India, building freight corridors, smart city drive, rural electrification and housing for all — steel demand could recover over the next year.

Published on September 22, 2019
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