NMDC share price zooms 12% on demerger of iron & steel plant; move could lead to value unlocking

NMDC said that the pandemic took a toll on its operations during the quarter, resulting in a loss of around 18.23 LT of production and 23.94 LT of Sales of Iron Ore.

Mining major NMDC’s share price surged 12.66% on Friday morning to trade at Rs 108 per share, a day after the company reported its April-June quarter earnings. NMDC, a Government of India owned mineral producer also informed the investors that its board has given its approval to the demerger of the NMDC Iron & Steel Plant. NMDC’s consolidated net profit fell over 50% from the previous year to Rs 531 crore as revenues took a hit. The company said that the pandemic took a toll on its operations during the quarter,  resulting in a loss of around 18.23 LT of production and 23.94 LT of Sales of Iron Ore.

Total income of NMDC was reported to be Rs 2,009 crore, down from Rs 3,386 crore in the same period last year. Expenses were down marginally to Rs 1,250 crore. Profit before tax for the company was recorded at Rs 758 crore, down 60% from the year ago period. On a consolidated basis, the net profit of NMDC stood at Rs 531 crore, down from Rs 1,717 crore in the year-ago period. Revenue from the iron ore segment stood at Rs 1,922 crore, while the sale of other minerals helped NMDC earn Rs 14 crore. 

However, despite this analysts at ICICI Securities believe that NMDC’s decision to demerge the steel plant can allow value unlocking for customers. “The in-principle approval by the board of NMDC to demerge the steel plant, i.e creating a separate listed company eventually with a shareholding akin to NMDC will be value accretive to the minority shareholders,” ICICI Securities said in a note. The brokerage firm said that, if NMDC succeeds in the demerger in a time-bound manner, it could lead to allowing FCF yield and correspondingly the dividend yield of NMDC to increase substantially. 

In the coming quarters, an increase in steel prices is also likely to help NMDC. “With approaching commissioning of the steel plant and the in-principle approval of demerger, as well as series of price hikes underway, NMDC makes a compelling investment case,” ICICI Securities added. With a ‘Buy’ call the brokerage firm has pinned a target price of Rs 130 on the stock.

NMDC shares have gained 70% from their March lows, when they tanked to trade at a price of Rs 63 per share. According to Edelweiss Securities, Production by major domestic steel players has touched pre-covid-19 levels. This could prove to benefit NMDC. “As per company estimate loss of iron ore sales due to Covid-19 has resulted in a loss in Sales revenue of around Rs 737 crore and PBT of Rs 317 crore for Q1FY21. However with domestic steel production continuing to improve the company’s financials should improve in the next quarter,” said Jyoti Roy, DVP- Equity Strategist, Angel Broking.