NMDC has scope to hike iron ore prices further

ET Intelligence Group: NMDC, India’s largest iron ore miner, is gaining pricing power once again due to the shutdown of some of the mines in Odisha due to rail line disruptions, rising international iron ore prices and higher demand in a seasonally strong part of the year

The miner has raised prices by up to 13 per cent for December deliveries, highest in the past two years. International iron ore prices too have gained 21 per cent , thus giving comfort that the domestic iron ore prices would either remain stable or move up. Currently, the landed cost of NMDC’s ore at the steel plants of its clients is 20-30 per cent cheaper than that of international ore. This offers headroom for NMDC to increase prices further.


Apart from prices, ore volume is also expected to pick up. NMDC With mining capacity of 46 million tonnes per annum (mtpa) in Karnataka and Chhattisgarh, NMDC operates at 80 per cent capacity utilisation. This may increase since its clients including JSW Steel, Essar Steel and Rashtriya Ispat Nigam are ramping up production. Analysts expect the incremental demand of 15-20 mtpa and NMDC is well placed to serve this given its high grade of iron ore and access to rail infrastructure.

Analysts expect NMDC to deliver around 48 per cent growth in operating profit before depreciation (EBITDA) for FY18 and a 12-15 per cent growth in FY19. In the first half of FY18, the company has delivered 64 per cent EBIDTA growth.

In October, there was a disruption in the slurry pipeline in Chhattisgarh used by NMDC to supply ore. The pipeline is expected to be restored in two-three months. Analysts believe that the recent price increase will offset the loss caused by the pipeline disruption.

At Wednesday’s closing price of Rs 128.4 on the BSE, NMDC’s enterprise value was 5.8 times the FY18 expected EBIDTA. Given the future growth prospects, analysts have assigned a higher multiple of 6.5 to 7 times, which implies 12-20 per cent increase in the stock price.

In addition, the company plans to set up three mtpa steel capacity as a part of its strategy to forward integrate. The value of this project is not yet captured by the current stock valuation. According to the management, the plant will be commissioned within two years.