Despite near-term hurdles, cash-rich NMDC’s future appears brighter

NMDC plans to ramp up its mining capacity, from a little less than 50 million tonnes currently to 100 million tonnes by FY30. (Photo: Mint)
NMDC plans to ramp up its mining capacity, from a little less than 50 million tonnes currently to 100 million tonnes by FY30. (Photo: Mint)

Summary

The longer-term outlook for NMDC appears bright with significant investments in infrastructure development and rising share of investments in India’s GDP.

State-run NMDC Ltd’s stock has underperformed the Nifty Metal index in the last one month. However, it is still up almost 50% over the last six months versus a 30% gain in the index. The outperformance suggests investors aren’t discounting the adverse change in the business environment adequately.

Provisional production numbers in March show NMDC, India’s largest iron ore producer, has fallen short of its annual production target of about 47 million tonnes (mt) for FY24. It produced 45 mt in FY24, a record still.

The March quarter (Q4FY24) results could reflect the twin challenges of lower realization and relatively slower volume growth.

Consider this: NMDC’s sales volume grew by about 1% in Q4, a sharp slowdown from a nearly 24% growth seen in the nine months through December of FY24 (9MFY24).

After a series of price increases, the iron ore producer cut prices in March. This reduction came just two months after the last hike, indicating the sudden change in market conditions. What’s more, it may need to take further price cuts, as domestic prices are still higher. Historically, local ore prices are 60% below international prices. Currently, the rates are only 45% below international prices, a report by Systematix Institutional Equities said.

While the momentum in revenue accelerated in 9MFY24 with growth of 25% year-on-year, subdued volume growth and the price cut in Q4FY24 can be a drag for the full-year figures.NMDC’s Ebitda margin has already dropped to 35% in 9MFY24 from a high of nearly 57% in FY21, with commodity prices being off their peak. J P Morgan projects NMDC’s Ebitda margin to stay in 35-38% range for FY25 and FY26.

Note that the international iron ore mining industry is facing high inventory build-up due to lower demand in China and higher supply from Australia.

“The prices have tumbled by over 25% since the beginning of the year as China’s real estate and manufacturing activity remained under pressure," said the Systematix report of 2 April.

On the bright side, the longer-term outlook for NMDC appears bright with significant investments in infrastructure development and rising share of investments in India’s GDP.

NMDC’s net cash of 11,500 crore would take care of its capex needs for the next 5-6 years. Undeterred by the short-term pressure, NMDC plans to ramp up its mining capacity, from a little less than 50 million tonnes currently to 100 million tonnes by FY30.

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