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Stock pick of the week: Why analysts are betting on NMDC


Despite weak performance by the metals and minerals sector, NMDC continues to report good growth. The company’s revenue and earnings growth were 5% and 26% respectively in 2018-19. Its performance in the last quarter of 2018-19 was also excellent—31% year-on-year net profit growth. The share price of this Navratna PSU, the largest domestic iron ore miner and also the lowest cost iron ore miner in the world, is yet to react positively to its high growth. In fact, it has been reacting negatively to short-term production disruptions.

While other fast-growing companies are trading at exorbitant valuations, NMDC is still available at a PE of just 6.98. The company also has a good dividend payout and buy back track record. While high dividend yield remains the key reason to invest in this counter, analysts believe that the market has been ignoring several other positive actors.

Analysts’ views

Sell: 2

Hold: 4

Buy: 12

First, the outlook for domestic iron ore demand is quite good. Due to supply disruptions from Brazil, global iron ore prices have jumped up 50% from January and are now close to five-year highs. Though domestic iron ore prices did not rise in tandem with the global rise in prices in the short term, they are expected to do so in the medium term. Rising domestic steel production, disruptions in the domestic iron ore production, etc., will also raise domestic iron ore prices.

Second, NMDC has high earnings visibility because of its high quality mines and long mine life. However, the market is focusing more on production-related issues in some of its mines. For example, its mining unit in Donimalai, Karnataka has remained shut since November 2018 because of a royalty dispute with the Karnataka government. NMDC’s volume guidance for 2018-20 is only for 32 million tonne (not accounting for the possible production restart of the Donimalai unit, which has a capacity of six million tonne). The Donimalai case is pending in High Court and a favourable verdict will be a bonus for the counter.

Analysts say that the market has also been ignoring one of NMDC’s major investments. The work on its three million tonne per annum steel plant is progressing smoothly and the plant is expected to be commissioned in the second half of 2019-20. The company has already spent around Rs 15,000 crore on this plant and the additional capex of around Rs 3,000 crore will be met from internal accruals. NMDC’s free cash flow position will improve significantly once this ongoing major capex is over.

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Selection Methodology

We pick the stock that has shown maximum increase in consensus analyst rating during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with a decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.





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