NMDC, the country’s largest iron ore miner, has overcome two primary concerns that have been an overhang on the stock — its investment in steel business and impact of export duty imposition on realisations. The steel plant that has been in development for six to seven years has been listed as a separate entity (NMDC Steel), de-risking NMDC financially and operationally. This has also resulted in better management bandwidth post the demerger and good balance sheet, unencumbered by investments in steel business.

Further, the export duty reversal has played out and the pricing is improving from a lower level. The stock, meanwhile, is currently trading at 4.2 times one-year forward EV/EBITDA, which is 12 per cent below its five-year average. Also, the stock prices imply a 7 per cent dividend yield to investors. The company may see strong volume growth in the next two years. The demand for iron and iron ore should sustain at the current levels with Chinese demand back internationally and strong infrastructure focus in the country.

We recommend investors to accumulate the stock, given its good dividend yield as well as scope for capital appreciation.

Price and volume growth

NMDC reported sales decline of 38 per cent in 9MFY22 as prices and volumes had declined from a high base in FY22.

From an average realisation in iron ore of ₹4,622 per tonne in FY21, the company witnessed a sharp 38 per cent increase to ₹6,380 per tonne in FY22. This came about as the prices of steel rallied in the year owing to return of demand post-pandemic, and supply constraints in the international market. Following this, the Central government imposed an export duty on steel products (15 per cent) and iron ore (45-50 per cent) which impacted the realisations in domestic markets. In the 9MFY23 period, the average realisations declined to ₹4,600 levels. The short-lived duty was revoked in November 2022 and NMDC can expect further growth in realisations on a weak base in the next one year. The prices announced for February 2023 by NMDC already indicate a 16 per cent increase from November 2022 prices, which improves the outlook for Q4FY23 results onwards.

The sales volume also declined in the 9MFY23 period (down 8.7 per cent YoY) as steel industry demand was impacted by the duty imposition and high base. NMDC had earlier reported a strong 22 per cent YoY increase in sales volumes in FY22 to 40.5 million tonnes (mt). The company has announced several projects to increase production capacity and reach 50 mt in the next one year. Increased production from existing mines in Bailadila (6-7 mt) and Karnataka’s Donimalai mines (3 mt) should start as supporting infrastructure capex is completed and commercialised, which should be expected in the next two years (NMDC expects to commercialise by CY24 end). The company has announced capex projects of ₹1,500 crore in FY24 and expects to invest ₹1,500-1,800 crore in FY23, which excludes the committed investment of ₹2,000 crore in NMDC Steel.

Demerger to support continued dividend play

NMDC had invested close to ₹20,000 crore in NMDC Steel (which has been demerged with shares issued to NMDC investors) and further commitment is to the tune of ₹2,000 crore. The financing for this has been tied up. NMDC may acquire 10 per cent of NMDC Steel as the promoter (GoI) goes for a stake sale in the entity. The 3 mt planned capacity of NMDC Steel will be tied up with NMDC for iron ore supplies which, when functional, will require close to 3-5 mt of iron ore on operationalisation; expected in the next one year. Beyond supply links, NMDC Steel demerger can allow NMDC management to focus once again on the iron ore operations and the company financials will not be burdened with capital commitments.

Another possible gain from the demerger could be on the dividend front. NMDC has had a dividend yield of average 7.2 per cent in the last four years, with 9 per cent yield in FY22 and the company can be expected to sustain a high yield post demerger (although actual dividends in future will depend on board of directors’ decisions).

As per a recent ruling from the Supreme Court, NMDC can expect to get back ₹1,500 crore from an SPV created by Karnataka Government to collect levies for mitigating environmental damage due to mining. The SPV had levied a higher charge earlier as part of mining-related levies. NMDC currently expenses an average of 44 per cent of sales in 9MFY23 as royalties (22 per cent), SPV levies for environmental damages and DMF (district mineral foundation) and others. Any possible rationalisation should aid further improvement in dividend yield.

NMDC reported revenues of ₹11,815 crore and EBITDA of ₹3,898 crore (margin of 33 per cent) and net profit of ₹3,326 (margin of 28 per cent) in 9MFY23. The company has a strong balance sheet with net cash of ₹6,300 crore as of December 2022. Considering the valuation at 4.2 times EV/EBITDA and PE of 6.3 times (both one-year forward), and strong volume growth potential, investors can accumulate the stock as iron ore/steel demand gains strength from the infrastructure push in the country.

Overhang on iron ore prices and steel plant have abated
Volume growth to sustain as demand picks up
Favourable risk-reward