NMDC Ltd shares were all lit on Friday, climbing nearly 12%, although its June quarter results were hit hard by the covid-19 lockdown. Management’s announcement of the divestiture of its upcoming Nagarnar steel plant, Chhattisgarh, in another unit, could ease pressures on the company’s cash flow. But other benefits could be capped.
NMDC plans to split up the steel unit and create a separate listed entity with a stake similar to that of the parent entity. The steel plant experienced delays in commissioning, which put pressure on NMDC’s cash flow. Considering all the expansions, NMDC’s cash per share depleted to single digits in FY20, analysts said.
Therefore, the demerger is seen as a value creation proposition for NMDC shareholders. “If conducted within a limited timeframe, it can lead to separate fundraising avenues for the Indian government, and allow the free cash flow yield and therefore the dividend yield of NMDC to increase significantly. “ICICI analysts said. Securities Ltd in a client note.
Even so, the sharp rise in the stock price on Friday seems a bit exaggerated. Some analysts have said it will not be an easy road. The separation process could take around nine months, according to management. However, delays can weigh on cash flow. The steel plant has experienced cost overruns in the past. “If the NMDC merges its steel assets, this is a positive, albeit limited, point because you have to compare its capital intensity against industry benchmarks; In addition, there are pending capital expenditures to bring the plant into service, ”said Ritesh Shah, analyst at Investec Capital Services.
Meanwhile, NMDC’s June quarter figures show the impact of lower iron ore withdrawals and achievements. Iron ore sales volumes were down 28% year-over-year (year-over-year) in the last quarter. As a result, the impact on its Ebitda per tonne was brutal with a drop of almost 46% year-on-year. However, the company recently increased prices for iron ore. Globally, iron ore prices are significantly higher than domestic prices. In addition, steel production is steadily increasing and is approaching pre-covid levels. “Given the current steel spreads, the slow ramp-up of iron ore production at Odisha, and high iron ore prices around the world, we see substantial room for price increases,” said ICICI Securities.
Nevertheless, a further increase in domestic demand is crucial, as the demand for steel from end-user industries is still slow. Despite NMDC stock’s 26% appreciation over the past month, stocks are at about 23% of their pre-covid highs in January.
His price / earnings multiple jumped to about nine times the benefit from exercise 20, which seems steep. Investors will now follow the progress of the divestiture of the steel plant and the ramp-up of domestic iron ore production.