NMDC’s Q1 results were hit hard by covid-19 lockdown, but the firm’s plans to demerge its upcoming steel unit in Chhattisgarh has surprised the Street. The stock surged 10% in early trade on Friday.
The demerger of the steel plant would reduce the stress on its parent company’s balance sheet. The three-million-tonne steel plant coming up in Nagarnar, Chhattisgarh, has been delayed, and could be commissioned next year. NMDC has been funding the plant from its internal accruals. But now any additional funding for the steel plant would be funded by the demerged entity.
As such, the demerger could lead to significant value unlocking for NMDC. “If pursued in a time-bound manner, this can lead to separate avenues of fund-raising for the government of India, and allowing free-cash-flow yield and correspondingly the dividend yield of NMDC to increase substantially," said analysts at ICICI Securities in a client note.
But the company’s Q1 was not immune to the covid-19-led disruption. NMDC’s volumes declined 28% year-on-year as iron ore demand shrunk during the quarter. The management said that there has been a loss of about 1.8 million tonnes of production and 2.4 million tonnes of sales during the quarter. As a result, there has been a revenue loss of about Rs734 crore.
In addition, NMDC has been cutting prices of iron ore for some time to drive sales. This further led to a decline in realizations per tonne by about 18% y-o-y. Lower prices and offtake naturally saw its operating leverage shrink. NMDC’s Ebitda per tonne stood at Rs1,200 per tonne in Q1, which is among its lowest in the last several quarters. However, NMDC’s costs were muted during the quarter.
NMDC has increased prices of iron ore lately by about Rs700 per tonn. Besides, global iron ore prices are significantly higher than domestic prices. Given the current steel spreads, the slow ramp-up of iron ore production in Odisha and elevated iron ore prices globally, we see substantial scope of price increases going forward," said the ICICI Securities report.
But the company’s recent stock price jump of 27% in the past one month has expanded its stock’s valuations. Any additional gains will hinge on how soon the company can demerge its entity and further ramp-up domestic iron ore production.
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