NMDC’s May sales lower year-on-year; recovery may take time in coming1 min read . Updated: 02 Jun 2020, 10:40 PM IST
While NMDC’s 5.5 trailing price-earnings ratio gives assurance, the slow lane drive may cap prospects
Reflecting the severely-curtailed production of steel companies due to the lockdown, NMDC’s iron ore sales were dull year-on-year. The road ahead now appears to be slow since manufacturing and construction activity is yet to gather steam.
Nevertheless, hopes have risen in May as NMDC’s sales have increased to 2.6 million tonnes from 1.4 million in April. This shows that a modest recovery in iron ore sales is taking place even as steel companies are beginning to ramp up production.
To drive sales, NMDC has been reducing iron-ore prices since the beginning of this year. Just last month, it cut prices of lump ores by 15% and of iron-ore fines by about 17%. In 2020 overall, it cut prices 30-33%. Notably, this has widened the disparity between global and domestic prices of iron ore.
Lower iron ore prices will be beneficial in driving more sales. “The recent price cuts have brought NMDC’s better grade ore at parity with Odisha. This will enable pellet producers to increase their margins as they will be able to produce quality pellets at a similar cost. Furthermore, potential delay in new lessees commencing operations in Odisha will result in higher procurement from NMDC in the near term," said analysts at Edelweiss Securities in a note to clients.
But much will depend on how soon the domestic steel industry ramps up production. While May’s production figures of steel companies point to an improvement due to pent up demand, in the long-run, production growth could still be slow and gradual, although the fiscal second half is expected to see faster growth.
Nevertheless, analysts have maintained sales growth at par for FY21. This does not include sales from the Donimalai mines, which could further add to volumes when production resumes.
Still, investors banking on a faster revival in the steel sector could be disappointed. However, any increase in domestic iron ore prices must be watched as NMDC could also raise prices when demand rebounds.
For now, while the stock’s price-earnings multiple of 5.5 times trailing provides some assurance, the slow lane drive may cap prospects.