Can FY25 break NMDC’s momentum?

International iron ore prices are showing signs of weakness amid subdued steel demand. (File Photo: Bloomberg)
International iron ore prices are showing signs of weakness amid subdued steel demand. (File Photo: Bloomberg)

Summary

  • While NMDC expects a roughly 20% volume increase in FY24 on a lower base, growth is expected to slow down in FY25

Investors in NMDC Ltd have had a fruitful year, with the stock climbing over 70% in 2023 and a nearly 17% increase so far in 2024. The state-owned iron ore miner's performance has been buoyed by two price hikes in January, consistent progress towards its FY24 volume goals, and a better-than-expected profitability in the December quarter (Q3FY24), bringing cheer to its investors.

In Q3, NMDC saw its Ebitda (earnings before interest, tax, depreciation, and amortization) per tonne soar 49% year-on-year to 1,781, thanks to increased volume and higher realization, with a favourable product mix contributing to this rise. The company is poised for a strong final quarter, bolstered by a price increase of 600-650 per tonne in January, which would boost realization further. Moreover, NMDC is confident of achieving a production volume of 46-47 million tonnes in FY24, marking a 13% year-on-year increase in Q4 to meet the lower end of its guided range.

However, questions loom about the company's prospects beyond Q4.

While NMDC anticipates a roughly 20% volume increase in FY24 on a lower base, growth is expected to slow down in FY25, with projected volumes of 50-51 million tonnes, marking about a 9% increase. The potential for further price hikes also seems uncertain. “We see iron ore prices peaking out and expect a fall in iron ore prices in FY25," said analysts at Nuvama Research in a report on 15 February. The broking firm has factored in a price drop of 750-900 per tonne in FY25, compared to Q4FY24 average.

Adding to the challenges, international iron ore prices are showing signs of weakness. For instance, the average price of China iron ore fines in February so far is about $129 per tonne, down 5% versus December average, according to BigMint (formerly SteelMint). Moreover, the demand conditions for steel are not so encouraging. Iron ore is a key raw material used in steel production. The average price of domestic hot-rolled coil in February is down by 6% compared to the 2023 average. “Increasing captive iron ore by integrated steel companies remains a structural headwind for NMDC," said a report by Kotak Institutional Equities on 14 February.

With investors sitting on handsome gains, a key dampener would be NMDC not being able to meet its volume guidance. As things stand, NMDC’s shares are just 3% away from the 52-week high of 252.40 apiece seen on 15 February.

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