NMDC’s high dividends under threat on earnings pressure

One of the attractions of the NMDC Ltd stock is its high dividend. In the previous two fiscal years, the company paid a dividend of about ₹ 8 a share each year. During the period, about 52% of the annual profits have been paid out as dividends.

In fact, as NMDC benefited from supply tightness and the government squeezed the public sector firms for more payouts, dividends increased drastically in recent years. They rose from ₹ 93 crore in 2009-10 to ₹ 3,390 crore for the last fiscal year.

But that rising trend is likely to reverse in the current fiscal year or the next one. The slump in commodity prices and production cuts at the user industries are crimping NMDC’s sales. Iron ore sales dropped 17% in five months to August. Sales in the similar period of last year had increased by 18%.

Prices are falling at an even faster pace. The current selling price of iron ore lumps is about 38% lower than a year ago. Analysts fear the company is yet to see the worst. Restarting of mines in Odisha and Jharkhand, and weak international rates can add to the pricing pressure.

NMDC expects to ride out the local demand slump through exports. Sops like the cut in rail freight rate for iron ore exports are expected to aid the company. But that alone may not be sufficient to fill the void in domestic demand. Exports’ contribution to overall sales is not too significant—they stood at 8% in the last fiscal year. Also low realizations mean NMDC is expected to post significantly lower profits, which in turn could weigh on the dividend payments.

“We reduce NMDC’s Ebitda (earnings before interest, taxes, depreciation and amortization) and EPS (earnings per share) estimate by 23%/20% and 17%/16%, respectively, for FY16/17 as we model lower prices and volumes. We believe dividend would reduce from ₹ 8.6/share to ₹ 5/share even as we keep payout ratio at FY15 levels,” IIFL Institutional Equities said in a note.

Bloomberg consensus estimates the company to generate a profit of ₹ 4,022 crore for the current fiscal year. If NMDC has to maintain dividend at the previous fiscal year’s level, it will have to shell out 84% of the forecasted profit, a tough task considering the company’s expansion and investment plans.

The NMDC stock is reflecting some of the concerns—it’s down 42% from last year. But the days of record dividend payments may well be over for now.