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High valuations keep NMDC shares down

High valuations keep NMDC shares down
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First Published: Tue, May 25 2010. 10 11 PM IST

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint
Updated: Tue, May 25 2010. 10 11 PM IST
Iron producer NMDC Ltd’s March quarter results have benefited from higher price realizations. Net sales rose by 25% to Rs1,983.30 crore quarter-on-quarter (q-o-q). It hiked prices by around 16% in January, compared with Rs2,470 a tonne in the first nine months of fiscal 2010.
Operating profit margins were stable at around 69% of sales and operating profit rose sequentially by 27.9% to Rs1,379.2 crore. While NMDC’s other expenditure as a percentage of sales was down to 19% from 24% on a sequential basis, its employee costs nearly doubled.
Graphic: Naveen Kumar Saini/Mint
NMDC’s margins could improve further in the fiscal, following a near-90% rise in prices of international benchmark contracts from April. Spot prices in the past two months have been around $150-180 (Rs7,110-8,532) a tonne. Contract rates, too, were around $130-140 a tonne. NMDC, which benchmarks its prices to global markets, announced a provisional hike in price ranging from 35-56% across various grades.
Despite the improving sequential performance, shares of NMDC have declined from the FPO (follow-on public offering) price of Rs300. It is down by 9% at Rs273. This perhaps reflects the concern in commodity markets following the European crisis and the reduction in offtake of the ore by Chinese steel makers.
Estimates suggest that China’s iron ore imports, following lower steel production, has dropped from 62 million tonnes (mt) in January to 55 mt in April. There are also concerns about the Indian government increasing export duties on ore in response to lobbying by domestic steel makers.
A softening of steel prices, too, could affect ore prices. According to sector analysts, steel prices are expected to come down sharply over the next few quarters, which may lower the demand for iron ore. As a result, it may lower the bargaining power of ore producers for the second quarter for fiscal 2011. About 15% of NMDC’s revenues come from exports, with the major chunk coming from sales to leading domestic steel makers. But NMDC’s realizations would mirror the global trend, even if with a lag.
These concerns apart, stock valuations also appear expensive. Says an analyst from a leading Mumbai-based broking firm, “NMDC is operationally well managed. Yet, it trades at about 10 times the enterprise value to Ebidta (earnings before interest, tax, depreciation and amortization), based on estimates for fiscal 2012. Even the top three global giants (in the mining industry) quote at about five to six times.”
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First Published: Tue, May 25 2010. 10 11 PM IST