NMDC Ranking: Collapse | Sales fell significantly in Q1FY23

The NMDC cut prices by 36% in May-June 2022 on the imposition of export duties and we expect further weakness given a 20% correction in railroad iron ore prices. shipping over the past month. Sales volumes contracted significantly in Q1FY23, driven by consumer destocking, and are expected to recover in H2FY23E. We believe the recent underperformance in equities reflects the sharp decline in margins from Q2FY23E. We reduce Profit, FV to Rs 105 (instead of Rs 110) and revise the rating to Cut (instead of Sell).

Prices are expected to remain under pressure despite the sharp price cuts in June 2022: In May-June 2022, the two NMDC revisions saw fines prices drop to Rs 3,310/tonne (instead of Rs 5,160/tonne ) and package prices drop to Rs 3,500/ton (instead of Rs 5,420/ton). However, after the last revision in early June 2022, seaborne iron ore prices have further corrected by 20% to $114/tonne CFR China. NMDC prices are now at a 33% discount to import parity, but at a 12% premium to export parity. In the current sluggish demand environment, we believe domestic iron ore prices would trade closer to export parity and we believe domestic prices will remain under pressure in Q2FY23E.

Volumes face headwinds on demand amid oversupply: export duties on pellets (45% vs. zero previously) and iron ore (50% vs. 30% previously ) depressed India’s iron ore exports. India is an oversupplied iron ore market and export duties have made exports unviable. Supply pressure is visible in NMDC’s low sales volume, -20% YoY in Q1FY23 and -40% YoY in June 2022 despite the sharp price drop. We note that the market surplus is likely to worsen in fiscal year 2023E due to declining exports and ramping up volumes from captive mines. We have reduced NMDC volume estimates by 3/2/2% and now estimate volumes at 41/43/44 million tonnes for fiscal years 2023/24/25E, respectively.

Mill Value Unlocking Remains Elusive: Mill commissioning continues to face operational challenges and we expect the same in Q4FY23E vs. September 2022. Shareholder and creditor approvals have been obtained, but listing of the steel entity is unlikely before Q4FY23E.

Reduce income; revise the note to reduce
We have reduced our EBITDA estimates by 7/7/8% for FY 2023/24/25E due to lower volume and price estimates due to domestic demand headwinds. Our EBITDA estimates are 26/40% below consensus for FY2023/24E and we expect strong downward revisions. Our FV is reduced to Rs 105 (from 110) in March 2024E at 4X EV/Ebitda unchanged.

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