NMDC's 'Made in China' problems to trigger earnings downgrade, says Kotak Equities; stock falls 4%

It's losses now extend to 19% in six straight sessions.

In its stock review note, Kotak said that seaborne iron ore prices have come down by 25% in the past one month to $106/ton which is an 18-month low. The sharp fall has been led by a bleak outlook on Chinese steel demand and rising iron ore inventory in the world's second-largest economy along with a lack of cost support.

"NMDC’s fines prices are at a 35% premium to export parity and we expect a sharp cut in prices, likely in April 2024. We also believe that the best volume growth is behind us in 11MFY24 and will see only a moderate 3.8% CAGR over FY2024-26E, similar to last decade," the Kotak note said.

Moreover, the domestic iron ore market surplus should significantly increase in FY2025E led by weak domestic steel prices.

With the recent correction the stock prices have slipped below the 50-day simple moving average (SMA) of Rs 226.50 while still trading above their 200-day SMA. The stock has had a good run over the past 12 months having rallied 75%. It has outperformed Nifty which has delivered returns of 28% during this period.

NMDC has witnessed 22% year-on-year volume growth in 11MFY24 which is an aberration in Kotak's view and cannot be extrapolated with FY2023 having a low base due to export duty in 1HFY23. Moreover, increasing captive iron ore by integrated steel companies remains a structural headwind for NMDC, it said it forecasts a 3.8% CAGR volume for FY2024-26E, similar to last decade.

In February, Aditya Birla Mutual Fund sold shares worth Rs 193 crore in the company.

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