Investors in the NMDC Ltd stock have little to crib about. Its shares have gained nearly 39% in 2023 so far. The state-owned iron ore producer’s steady progress towards its volume target in FY24 has pleased investors. NMDC aims to clock volume in the range of 47-49 million tonnes this fiscal year. In the first seven months of FY24, volume was 23.5 million tonnes, up by 19% year-on-year. This means the ask is lower now. To achieve the mid-point of its guided range, NMDC must record a lower growth of nearly 14% in the remaining months.
Plus, a couple of factors would support growth. The Bacheli plant in Chhattisgarh and the Kumaraswamy mines are expected to start production soon and should roughly add 4.3 million tonnes per annum of capacity. Additionally, NMDC has started supplying iron ore to NMDC Steel Ltd, which is operating at 40-45% capacity now. This is expected to rise to 70% by the end of this fiscal year and thus boost NMDC’s volume.
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Besides, NMDC’s iron ore prices could see an uptick. In the September quarter (Q2FY24) earnings call, the company said it will take a call on price revision in the coming days. The last hike was taken in October and now the price of lump ore and fines stand at ₹5,200 and ₹4,460 per tonne, respectively. Currently, the share of fines sales was 70% and this is expected to grow further in the coming quarters backed by healthy demand.
Overall, the strength in global iron ore price augurs well. For perspective, the price of China iron ore fines in November was up by nearly 8% month-on-month to $128 per tonne, according to SteelMint.
Having said that, one should be wary of the weakness in steel price as iron ore is a key raw material used in steel production. Domestic hot rolled coil price was down by 4% month-on-month in November to ₹55,450 per tonne.
“Going forward we expect NMDC to take price hikes while more than 15% volume growth should continue in the second half of FY24. We maintain our 46/50 million tonne volume estimates for FY24/FY25 while raising FY25 iron ore realization from ₹4,350 per tonne to ₹4,512 per tonne,” said analysts at Prabhudas Lilladher in a report on 18 November.
To be sure, in Q2, NMDC’s blended realization fell sequentially by almost 15% to ₹4,194 per tonne. This comes after growth in the metric for two straight quarters. An adverse mix played spoilsport with Karnataka forming 37% of volume in Q2 versus 30% in Q1. Note that Karnataka has lower quality iron ore and thus lower realization versus Chhattisgarh. While royalty expenses were lower, a rise in employee and other expenses meant a 31% drop in Ebitda per tonne. Ebitda is earnings before interest, tax, depreciation and amortization, a measure of profitability.
Meanwhile, NMDC estimates the capital expenditure (capex) in FY24 to be in the range of ₹1,800-2,000 crore, which is higher than its initial target. In the first half of FY24, the miner incurred ₹1,000 crore capex. Further, in FY25 it aims for capex of ₹2,200-2,300 crore. Such projects would enhance the company’s evacuation capacity and brighten volume growth prospects helping it reach 100 million tonnes per annum capacity by FY30.
For now, investors in NMDC shares are capturing the optimism adequately, which limits meaningful upsides. Moreover, Kotak Institutional Equities sees structural headwinds in the domestic iron ore market for merchant miners given increasing iron ore integration of steel majors.