Iron ore prices cast chill over NMDC earnings


NMDC Ltd’s September quarter (Q2FY23) numbers were dull on many counts, sharply missing the Street’s expectations. This led to a cut in earnings estimates of the state-owned iron ore producer for FY23 and FY24.

In Q2, earnings before interest, tax, depreciation, and amortization (Ebitda) per tonne dropped to a multi-quarter low of 1,009, thanks to a confluence of factors such as adverse mix, sale of high cost inventory amid lower prices, and weak demand. The main villain for NMDC was the significant drop of 48% year-on-year in average sales realization per tonne to 3,947.

Free fall

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Free fall

Unsurprisingly, NMDC’s shares fell around 4% on Tuesday on NSE.

The trouble is that the company’s woes are far from over. The rise in export duty on iron ore effective 22 May remains an overhang.

Based on latest data, prices of NMDC’s lump ore and fines are down by roughly 33% and 44%, respectively, compared to the levels seen at April-end, which is before the government raised export duty. As such, investors can rule out red-hot prices.

“We believe iron ore prices will remain under pressure and will not pick up as long as export duty on iron ore continues. We also expect steel companies to ramp up their captive mines that will further reduce the demand for merchant iron ore,” said analysts at Motilal Oswal Financial Services in a report on 14 November.

The silver lining is that Q3 and Q4 are seasonally strong quarters for the construction industry, which augurs well for steel demand and hence iron ore. The state-owned iron ore producer’s volumes are likely to increase from the level of 8.4 million tonne seen in the second quarter. However, the benefits from volume growth is likely to be offset by the subdued pricing environment. A rebound in global demand for steel would support prices.

Meanwhile, the demerger of steel plant from NMDC may improve the company’s asset and return ratios.

However, again, the lower realizations for iron ore may weigh heavily on these metrics. As ICICI Securities pointed out, NMDC’s FY24 estimated RoE/RoCE at 17.8%/22% is no better than seen in the FY18-FY19 period and significantly lower than FY22. RoE is return on equity and RoCE is return on capital employed.

“With no option value of the steel plant left in the stock, we perceive the stock price trajectory to largely follow the iron ore cycle – which, in the domestic market, seems to be in a downturn,” said a report by ICICI Securities on 15 November.

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