NMDC Shares Tumble As Kotak Institutional Equities Cuts Earnings Estimates

Shares of NMDC Ltd. fell the most in more than seven weeks after Kotak Institutional Equities cut its earnings estimates for the nation's largest iron ore miner, citing pressure on domestic prices and contraction in sales volume.

The company has cut its lump ore (65.5%, 6-40 mm) prices to Rs 3,900 per tonne for July compared to Rs 4,400 in June. The price of fines (64%, -10mm) has been hiked to Rs 2,810 per tonne on Tuesday.

NMDC had already cut its prices of fines and lumps by 36% in May-June 2022 on an imposition of export duty and prevailing weak demand, the brokerage said in a July 12 report. It expects “further weakness given a 20% correction in seaborne iron ore prices in the past one month”.

“NMDC prices are now at a 33% discount to import parity but a 12% premium to export parity. In the current gloomy demand environment, domestic iron ore prices would trade at closer to export parity and we see domestic prices to remain under pressure in Q2 FY23E.”

Also, the export duty on pellets (45% from nil earlier) and iron ore (50% from 30% earlier) have plummeted India's iron ore exports, the report said. “India is an oversupplied market for iron ore, exports form 10% of production, and export duty has made exports unviable.”

The supply pressure, Kotak said, is “visible in NMDC's weak sales volume” despite the sharp price cut. Sales volumes have significantly contracted in Q1 FY23, led by destocking by consumers. “The market surplus is likely to worsen in FY23E due to lower exports and ramp-up of volumes from captive mines.”

Sales volumes, it said, is likely to recover in H2 FY23E. Yet, Kotak cut NMDC's volume estimates by 3%, 2% and 2% to 41, 43 and 44 million tonnes in FY23, FY24 and FY25E, respectively.

The brokerage has also cut its Ebitda estimates by 7%, 7% and 8% for FY23, FY24 and FY25 on lower volumes and price forecasts due to domestic demand headwinds. “Our Ebitda estimates are 26% and 40% lower than consensus for FY23 and FY24, and we expect sharp downgrades.”

Kotak cut its fair value for NMDC to Rs 105 apiece from Rs 110, and revised its rating to ‘reduce' from ‘sell'. “The recent stock underperformance captures the sharp margin contraction from Q2 FY23E onwards.”

Shares of NMDC fell 6.65%, the steepest intraday decline since May 23, in early trade on Tuesday. The stock closed with 5.32% losses, its worst day in seven weeks. The stock's trading volume was more than thrice the 30-day average, when markets closed. Of the 23 analysts tracking the company, 11 recommend a ‘buy' and six each suggest a ‘hold' and a ‘sell', according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 38.7%.