Stock Fundamentals

NMDC stock holds potential. Here's why

Satya Sontanam | Updated on December 30, 2019 Published on December 29, 2019

Recent approvals for enhancing production, extension of mine leasing rights and healthy margins bode well for the company

NMDC, the country’s largest iron- ore producer, has been mired in issues of lease renewals at one of its mines — Donimalai. Besides, over the past year, there has been a sell-off across the metals and mining space, in the wake of trade tensions between the US and China.

These factors contributed to a significant correction in the stock’s price until mid-August.

But, changes in the mining law, easing of global uncertainties and other favourable news gave a leg-up to the stock, which has recovered about 50 per cent until now from mid-August.

There may be further upside to the stock, given the improving prospects of the company.

The latest approvals for enhanced production in Karnataka, lease extension of four mines in Chhattisgarh, and allocation of coking coal and thermal coal blocks have come as a shot in the arm for the company.

At ₹125, the stock is reasonably valued at about 8.3 times its trailing 12-month earnings, lower than its three-year average of 11.7 times.

Healthy operating profit margins, low leverage and good dividend pay-outs are other positives. The current dividend yield is more than 4 per cent.

That said, NMDC may feel the heat in the near term due to low demand. But the company’s fundamentals and long-term prospects seem good.

Investors with a high risk appetite and three- to five-year investment horizon can buy the stock.

 

The demand for steel has been weak over the past year due to the slowdown in the automotive and construction sectors; this has had a negative impact on the demand for iron ore, the key raw material for steel-making. Going ahead, the demand for steel, and in turn for iron ore, are expected to improve.

In the near term, the growth in demand for steel in India is forecast to rebound to about 7 per cent in 2020 as against five per cent growth estimated for 2019, according to the World Steel Association. In the long term, the steel sector should get support from the expected increase in infrastructure spending by the government.

Lease extension

NMDC operates three iron-ore complexes in the country, producing about 33 million tonnes per annum (mtpa) of iron ore, with an existing capacity of about 44 mtpa. The company operates open-cast mines at Kirandul (three mines) and Bacheli (two mines) in Bailadila sector of Dantewada district in Chhattisgarh, and two mines — Donimalai and Kumaraswamy — in Bellary district of Karnataka.

On December 17, the Chhattisgarh government extended the lease of four out of five mines in the Bailadila complex — lease rights of which were about to expire by March 2020 — for 20 years, until 2035 with effect from September, 2015. The four mines have an installed capacity of over 29 mtpa. The lease extension has come as a major relief to NMDC. It has come at a time when the company is in a tug of war with the Karnataka government over the renewal of its Donimalai mines which have contributed 17-20 per cent to the total ore production of NMDC in the past few years.

The lease extension in Bailadila, without much delay, could largely be a result of the recent change in Indian mining law — Minerals (Mining by Government Companies) Amendment Rules, 2015 — regarding the State governments’ role in extending the lease period of mining. The amendment substituted “may extend” with “shall extend”, making it mandatory for a State government to extend the lease period on an application by a government mining company.

Though the same law is applicable to the renewal of the Donimalai mines of NMDC, there has been no update on it yet. A favourable judgement for NMDC, if and when it happens, will provide a boost to NMDC.

NMDC’s Donimalai mine was suspended for operations in November 2018 when the company’s lease rights had expired. The licence renewal/extension of these mines did not happen as the company did not agree to the State government’s condition for renewal — to pay a premium of 80 per cent on the sale value of the ore extracted from the mines, a sharp jump from the current payouts.

 

 

Higher production on cards

There have been other positive developments for NMDC that could pave the way for enhanced production. The Indian Bureau of Mines, on December 18, approved the mining plan of NMDC to increase the production of iron ore from Kumaraswamy mines from 7 mtpa to 10 mtpa for 2020-21 and 2021-22.

At a time when production in the Donimalai mines is being cut, authority approvals for lease extension of Bailadila mines and higher production plan in Kumaraswamy would give a much- required boost to the company.

Expected cost control

Recently, NMDC announced that the Coal Ministry had allocated it two coal blocks — Rohne and Tokisud North — in Jharkhand.

This improves the security of raw material requirement for NMDC’s upcoming steel plant and will reduce the company’s power costs. While thermal coal from Tokisud North block (with reserves of about 52 mt and a production capacity of 2.32 mtpa) would be used as input for power generation, coking coal from the Rohne coal block (with reserves of 191 mt and a production capacity of 8 mtpa) would ensure coking coal requirement for the company’s upcoming steel plant, which is expected to commence operations in June 2020.

Despite a weak show by NMDC in the quarter ended September 2019, the half-yearly performance of the company in FY20 has been fairly decent with revenue and operating profit increasing 13 per cent and 8 per cent y-o-y to ₹5,505 crore and ₹ 3,177 crore, respectively. Higher realisations seem to have helped. But the cost increase exerted pressure on the operating margin, which fell to 58 per cent in H1FY20 compared with 60 per cent a year ago.

In the near term, a fall in realisations (due to recent price-cuts) and low demand from the steel sector could exert pressure on the the company’s profits. But its long-term prospects look attractive, given its strong position (about 30 per cent share) in India’s iron- ore market, expansion plans and the financial muscle to tide over tough times.

Published on December 29, 2019
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