Why NMDC stock witnesses rally on Friday’s session despite weakness in metal sector? Kotak Institutional Equities lists key triggers

NMDC Share Price: Despite overall weakness in the metal sector on Friday, shares of NMDC Limited have jumped over 5 per cent to Rs 111 a share after four days of consolidation this week. Domestic brokerage house Kotak Institutional Equities believes the stock soon would go under re-rating while listing positive triggers.

As per Kotak, NMDC has bitten the bullet on prices for volumes but is worst behind. The state-owned metal company earlier on Thursday announced a cut in iron ore prices by 9 per cent to revive volumes.

The brokerage added that prices and margins have bottomed out and the public sector company is a strong case for re-rating with improved capital allocation amid the demerger of a subsidiary.

NMDC cuts iron ore prices

NMDC has announced a 7/10 per cent price cut for iron ore fines/lumps or 9 per cent cut on a blended basis effective immediately. The company’s fine prices are now at 32 per cent discount to import parity versus a historic average of 20 per cent.

NMDC has been struggling on volumes with sales down 12 per cent year-on-year (YoY) Year-To-Date FY23 due to poor offtake from steel producers. Kotak notes that the sharp price cut has been taken with a focus on reviving volumes in the second half of FY23E.

Iron ore prices and margins bottomed

NMDC has cut iron ore prices by 46% YTDFY23 mainly led by an increase in export duty in May 2022 and a fall in seaborne prices. The brokerage believes iron ore prices both in domestic and seaborne markets have upside risks in 2HFY23

Upside risk is led by a recovery in domestic demand, allowing miners to raise prices, cost support and recovery in Chinese steel demand, and potential rollback of increase in export duty to 50 from 30 per cent. Kotak builds 22% higher realization versus spot in FY2024E assuming no cut in export tax.

Strong Re-rating Case

The brokerage sees a strong re-rating potential for NMDC after the steel plant demerger with improved capital allocation with investments only in the core business, higher FCF as the core mining business is not capital intensive, and increases in payout due to higher cash generation.

Kotak cuts the EBITDA estimates by 9/6 per cent for FY2023/24E, respectively, factoring the recent price cut. It upgrades recommendations to BUY from ADD with a target of Rs130 a share at 5.5X EV/EBITDA September 2024E as lower earnings get offset by lower capex assumptions.

Share Price History & Valuations

The stock in the last year and year-to-date has witnessed a correction of around 18 per cent, while it has tumbled over 15 per cent in the last six months on the NSE. According to BSE data, the company has a market cap of Rs 32,500 crore and a PE multiple of 5.23 as well a price to book of 1.6.

The 52-week high range of the counter is Rs 143.13-81.27 apiece, touched on April 11, 2022, and July 15, 2022, respectively. The return on equity of stock is at 30.74 per cent.