Home >Markets >Mark To Market >NMDC’s slow sales may put paid to hopes of a quick recovery
Much of this stemmed from the delay in allotting mining leases to steel producers and other bidders. (Aniruddha Chowdhury/Mint)
Much of this stemmed from the delay in allotting mining leases to steel producers and other bidders. (Aniruddha Chowdhury/Mint)

NMDC’s slow sales may put paid to hopes of a quick recovery

  • Investment in the new steel plant has depleted cash on its books to 5,200 cr in Sep, against 15,000 crore in end-Mar 2016
  • An inventory pile-up has curtailed demand for iron ore

Shares of NMDC Ltd have fallen about one-third from their highs in January. Adding to the list of concerns is the company’s lower sales this year. The miner sold 11% less iron ore in the first two months of 2020. Blame the dull steel industry for such sluggish numbers.

An inventory pile-up has curtailed demand for iron ore. Besides, the Covid-19 epidemic has shrunk demand for steel, particularly in the biggest market of China, leading to sluggish iron ore demand.

A positive, though, is that supply disruptions have kept iron ore prices up. In the last four months, iron ore prices have risen about 29%. Much of this stemmed from the delay in allotting mining leases to steel producers and other bidders.

Graphic by Paras Jain/Mint
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Graphic by Paras Jain/Mint

However, the recent allotment of mines to steel producers could slow demand for iron ore in the domestic market. Once commercial production commences from these mines, iron ore prices could ease further.

NMDC is expected to restart the Donimalai iron ore mines in Karnataka after the Union government amended the Mineral Rules, 2015, in favour of state-run firms. A decision by the Karnataka government is still awaited, but a further increase in iron ore supply in the market could be in the offing.

Also, the three- million-tonne-per-annum steel plant that NMDC is building may strain its cash flows in the near future. Investment in the plant has depleted the cash on its books to about 5,200 crore at end-September 2019, from about 15,000 crore in end-March 2016. Further reduction of cash on the books could eat into its dividend yields, which had provided investors some comfort in the past.

“Capital expenditure toward return on equity/return on capital employed dilutive steel plants may limit dividend outflow going forward," said JM Financial Institutional Securities Ltd in a note to clients.

Another overhang on the NMDC stock would be any further offer for sale from the Union government as part of its divestment programme. Already, the stock’s valuations have been knocked down to about 6.7 times trailing 12-month earnings. While that is ostensibly inexpensive, a revival could be long and arduous until the broader steel industry starts to shine and show the way.

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