Shares of NMDC, India’s leading iron ore producer, continued their downward spiral for the second day in a row, dropping 3.5% during intraday trading on March 11, landing at ₹63.71 per share. This decline follows a downgrade from Kotak Institutional Equities, which reduced its price target for the stock from ₹66 to ₹55 while maintaining a ‘Sell’ rating.
Factors Behind the Decline
The adjustment in target price stems from a fall in iron ore prices, largely attributed to a growing surplus in the seaborne iron ore market. Increased competition from domestic merchant iron ore mines, particularly those in Chhattisgarh, has also put pressure on NMDC.
- Key drivers of lower prices:
- Rising supply of seaborne iron ore.
- Increased domestic production from merchant mines.
The brokerage predicts that seaborne iron ore prices are likely to remain weak through 2025-2027, primarily due to:
- Protectionist measures affecting Chinese steel exports.
- Diminished domestic demand leading to decreased Chinese steel output, which, in turn, impacts global iron ore consumption.
Market Surplus and Future Projections
The anticipated growth in Tier-1 iron ore supply, especially from the Simandou mine, could create a considerable market surplus during 2025-2027. Speculation surrounding potential cuts in Chinese steel production due to supply-side reforms could exacerbate this surplus. Accordingly, Kotak estimates seaborne iron ore prices will be around $95, $90, and $85 per ton for fiscal years 2026, 2027, and 2028, respectively.
- Projected seaborne iron ore prices:
- FY2026: $95 per ton
- FY2027: $90 per ton
- FY2028: $85 per ton
Domestic Supply Challenges
On the home front, NMDC is expected to experience increased iron ore availability as exports wane and domestic merchant iron ore production ramps up. This scenario could lead to an excess supply in India for fiscal years 2026-2027. Notably, NMDC’s production volumes remained flat year-on-year during the first 11 months of FY25, falling short of the company’s 10% growth target.
- Concerns regarding production:
- Flat year-on-year growth.
- Rising domestic supply leading to volume disappointments.
Expansion Plans Under Scrutiny
NMDC’s ambitious plan to expand its capacity to 100 million tons per annum may face challenges due to a high capital expenditure of approximately ₹700 billion over the next five years. Such investment could hinder free cash flow, posing significant risks to the company’s financial health.
Regulatory Concerns: Karnataka Tax Bill
Adding to NMDC’s challenges, the Karnataka state government is considering a new royalty tax of 22.5% along with a mineral rights tax of ₹101 per ton. If enacted, this legislation could adversely affect NMDC’s earnings before interest, taxes, depreciation, and amortization (EBITDA) by 14% for Karnataka and 47% on a national scale in FY2026. Currently, the bill awaits the Governor’s approval, and the brokerage has yet to include this potential tax increase in its base case estimates.
Earnings Projections Adjusted
In light of these mounting pressures, Kotak has revised its EBITDA forecasts downward by 11% and 8% for FY2026 and FY2027, respectively. The brokerage cites concerns about lower production volumes and altered iron ore price expectations, highlighting significant risks to current consensus earnings.
In conclusion, NMDC faces a challenging landscape driven by both domestic supply dynamics and international market pressures, which could impact its financial performance in the coming years. Keep an eye on how these developments unfold and their potential impact on the iron ore market.
