Lower prices, volumes to mar NMDC’s near-term prospects

However, the company faces near-term headwinds, with the recent cut in prices reflecting global supply overhang. The management has guided for its average realization to drop to ₹4,300 per tonne in the September quarter (Q2FY25) from ₹5,300 per tonne in Q1FY25. Ebitda is earnings before interest, tax, depreciation and amortization.

Factoring the change in market conditions, most brokerages have lowered their earnings estimates for NMDC. “We are cutting FY25 and FY26 estimated Ebitda by 9% and 5% to factor in lower prices and volume," said Nuvama Institutional Equities’ analysts in a 16 August report. Similarly, Philip Capital India Research points out: “Given international prices below $100 per tonne, we believe that NMDC may face one last round of price correction in late August to early September, further impacting the performance." Philip Capital has reduced FY26 Ebitda estimates by 6%.

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The Supreme Court ruling

The mining industry is also assessing the financial liability arising from the recent Supreme Court ruling upholding state governments' right to levy taxes on ores mined within their respective states. The court’s decision is retrospective, applicable from 2005, which means miners would have to pay past taxes also in cases where states had raised the demand. However, states have the right to waive past dues.

According to NMDC management, the immediate liability arising out of the decision is only ₹21 crore. However, similar cases are pending before the court where NMDC would face a liability of ₹2,644 crore if the same ruling is given. Despite the company’s assertion that it would be able to recover this amount from its customers, it could be a lengthy, time-consuming process. Besides the past liability, NMDC would remain unaffected by the imposition of any levy in the future since its sales contracts allow it to pass on all government levies and taxes to buyers.

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The ruling on tax demand on a retrospective basis will affect mineral consumers the most, and there would be minimal impact on miners like NMDC and Coal India, according to Nuvama.

NMDC Steel dues

On the brighter side, the company’s demerged business, NMDC Steel Ltd, which had been running at lower capacity utilization because of evacuation issues, is projected to start making profits in H2FY25. The commissioning of a rail line, expected by September end, would help it reach full capacity utilization. NMDC Steel owes ₹2,400 crore to NMDC, nearly 30% of NMDC’s FY24 pre-tax profits and would have to repay this after it starts generating sufficient cash. NMDC also stands to recover this entire amount if the proposed privatization of NMDC Steel goes through.

While the company managed higher realization in Q1FY25, lower production led to an 8.2% drop in sales volumes. Production declined by 14% last quarter to just about 9.2 million tonnes (mt) owing to labour issues. While the company has maintained its volume guidance at 50mt for FY25 versus 45mt in FY24, it may be a tall ask to meet this target, given that Q2FY25 production is likely to get hurt due to flooding after a subdued Q1FY25. To an extent, higher production would aid the company’s profitability since nearly 90% of its cost is fixed in nature.

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NMDC’s stock price has declined about 3% since Q1FY25 results despite the strong show. The shares are down about 4.2% over the last six months amid weakening market dynamics. The stock trades at 6.5x FY25 consolidated EV/Ebitda estimate. A reversal in iron ore prices can act as a trigger in the coming months.