NMDC has cut its prices by 36% in May-June 2022 on imposition of export duty and we expect further weakness given a 20% correction in seaborne iron ore prices in the past one month. Sales volumes have significantly contracted in Q1FY23, led by destocking by consumers, and are likely to recover in H2FY23E. We believe the recent stock underperformance captures the sharp margin fall from Q2FY23E onwards. We trim earnings, FV to Rs 105 (from Rs 110) and revise rating to Reduce (from Sell).
Prices likely to remain under pressure despite sharp price cuts in June 2022: In May-June 2022, NMDC’s two revisions saw fines prices cut to Rs 3,310/ton (from Rs 5,160/ton) and lumps prices cut to Rs 3,500/ton (from Rs 5,420/ton). However, post the last revision in early June 2022, seaborne iron ore prices have corrected by a further 20% to $114/ton CFR China. NMDC prices are now at a 33% discount to import parity but at 12% premium to export parity. In the current gloomy demand environment, we believe domestic iron ore prices would trade at closer to export parity and we see domestic prices to remain under pressure in Q2FY23E.
Volumes face demand headwinds amid excess supply: The export duty on pellets (45% from nil earlier) and iron ore (50% from 30% earlier) have plummeted India’s iron ore exports. India is an oversupplied market for iron ore, and the export duty has made exports unviable. The supply pressure is visible in NMDC’s weak sales volume, -20% y-o-y in Q1FY23 and -40% y-o-y in June 2022 despite the sharp price cut. We note that the market surplus is likely to worsen in FY2023E due to lower exports and ramp-up of volumes from captive mines. We have cut NMDC’s volume estimates by 3/2/2% and now estimate volumes at 41/43/44 mn tons in FY2023/24/25E, respectively.
Value unlocking from steel plant remains elusive: The steel plant commissioning continues to face operational issues and we expect the same in Q4FY23E vs the company guidance of September 2022. Shareholder and creditor approvals have been secured but listing of the steel entity is unlikely before Q4FY23E.
Cut earnings; revise rating to Reduce
We have cut our Ebitda estimates by 7/7/8% for FY2023/24/25E on lower volumes and price estimates due to domestic demand headwinds. Our Ebitda estimates are 26/40% lower than consensus for FY2023/24E and we expect sharp downgrades. Our FV is cut to Rs 105 (from 110) in March 2024E at unchanged 4X EV/Ebitda.