NMDC which stands for National Mineral Development Corporation is an Indian state-controlled mineral producer. It is 72.43% owned by the Government of India and is under the administrative control of the Ministry of Steel. It is involved in the exploration of iron ore, copper, rock phosphate, limestone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite, etc.
The company’s shares have 52 weeks price band of INR 139-61 and a total market capitalization of INR 254 billion which makes it a Large-Cap company. The shares have a P/E ratio of 5.22 and a dividend yield of 9.72%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ★ ☆)
The company operates in the Metals and Mining industry where market dominance is achieved through scale and capacity, resources at disposal and market penetration. The company is the largest producer of Iron ore in India with a current capacity of 43 MTPA and guidance for increasing it till 67 MTPA in the near future. NMDC had a production of around 32.4 million tonnes of iron ore in FY 2019 and currently has a market share of about 24% domestically. The company is also a government of India undertaking but still not a natural monopoly due to the structure of the Industry.
The company is planning to expand its market share through a mix of greenfield and brownfield expansions along with strategic joint ventures. Legacy Iron Ore Ltd. is an ASX listed entity based in Perth, Australia with a focus on iron ore, gold and base metals.
NMDC has 78.56% equity in the company. It is also operating a diamond mine namely Diamond Mining Project, Panna (M.P.), which is the only mechanised diamond mine in Asia, with a yearly production of around 38,149 carats. Overall the company has a wide economic moat due to its scale and market penetration along with the backing of the government. Therefore this category gets 4 stars in NMDC fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ☆)
The business model of the company is such that it operates through 8+ subsidiaries, 6+ JV companies and 5+ associated companies. The revenue split is such that around 98% of the revenue comes from Iron ore extraction. The remaining 2% is contributed by the extraction and processing of diamonds, sponge iron, pellet etc and also from wind power generation. The company also has a good international presence through subsidiaries and JVs.
International Coal Ventures Limited (ICVL), a joint venture company of SAIL, RINL and NMDC. They acquired a thermal coal mine in Mozambique in 2014. The company was also declared as preferred bidder for Chigargunta-Bisanatham Gold block through an auction in 2018. Further, it is also in the process of setting up of a pilot-scale processing plant for gold in its mining unit in Tanzania.
Mr N Baijendra Kumar is the CEO and MD of the company and represents the government’s interest in the company. Mr P.K. Satpathy is the head of the production and is also Govt. Nominee Director and Financial Advisor to the Ministry of Steel. Overall the management is a part of the union government and has shown interest in the shareholder’s wealth. This can be seen by the average dividend payout of about 690% in the last 5 years. Therefore this category gets 5 stars in NMDC fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The company operates in an asset-heavy industry and therefore there are instances where working capital exceeds revenue. The company since 2016 has focused its agenda on core growth and has shown a steady increase in revenue and profitability. The Cap-Ex has also improved which indicates upcoming capacity expansion. Therefore this category gets 4 stars in NMDC fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ☆)
The gross margin has remained stable even with an increased capacity which indicates that the inflation-related costs are offset by economies of scale. The other margins have improved since 2016 along with the return on assets. NMDC posted a 76% decline in net profit during Q4 FY2020 due to Covid-19 lockdown in the country. However, these effects are only expected to be temporary. Therefore this category gets 4 stars in NMDC fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ★ ★)
The net income has improved over the recent years and the Cap-Ex as a percentage of sales has also increased. The free cash flow as a percentage of net income has been positive. Free and operating cash flow growth has improved significantly. This overall indicates a good cash flow position for the company. Therefore this category gets 5 stars in NMDC fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)
The company does not have any significant debt in its capital structure. Hence the financial leverage and debt to equity ratios have been flat over the years. The current and quick ratios have declined over the years but are still way above the minimum threshold. This overall indicates good liquidity and solvency position for the company. Therefore this category gets 5 stars in NMDC fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ☆ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
The business efficiency has almost remained stable over the years. The payable days have declined and stood at 189 days in 2019. The inventory days have reduced but the receivables day have seen a slight increase. Overall the cash conversion cycle has remained flat and positive over the years. Therefore this category gets 3 stars in NMDC fundamental analysis.
8. Valuation Ratios (★ ★ ★ ☆ ☆)
The company’s shares have been trading at flat multiples over the years. This is because the company’s earnings have a high correlation with the capacity of production. Also, the company gives out a large portion of its profits as a dividend every year. Hence the multiples are not expected to improve in the coming years. Therefore this category gets 3 stars in NMDC fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ★)
The company does not have long term debt and hence there are no interest payments. Thus the leverage ratio is flat and the interest burden ratio is at 100%. The Tax efficiency and operating margin have also improved in recent years along with the asset turnover ratio. Overall the Return on Equity has seen significant improvement due to improving profitability. Therefore this category gets 5 stars in NMDC fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- NMDC produced 31.49 MT of iron ore and sold 31.51 MT during 2019-20 against the production of 32.36 MT and sales of 32.36 MT during the previous year. The drop was due to the Covid-19 outbreak and production shutdowns. There has been a loss of around 10 LT (Lakh Tonne) of Production and 5.50 LT of sales in March 2020.
- In the near future, the company will experience production loss, labour crunch and declining demand in both national and export markets. This will deteriorate the financial strength and cash position of the company. The management can look for deferring Cap-Ex in order to conserve cash during these uncertain times.
- The sharp fall in PAT by 22% during FY 2020 was largely due to a one time expense. The company has opted to settle a dispute relating to Direct Tax and an amount of INR 795 crores was paid to the government.
- The demand for iron ore will remain modest in the near term as the world recovers from the pandemic and supply chains are restored. The till date loss for the company due to Covid-19 stands at a loss in sales revenue of INR 220 crore and PBT of INR 120 crore.
The company has seen a good improvement in fundamentals along with increasing profitability since 2016. The effect of Covid-19 is also expected to be temporary and the demand for iron and steel is expected to pick up from FY 2022. The shares may not see any significant appraisal in price but have a very high dividend yield which makes it a value buy at current price levels. Therefore this category gets 4 stars in NMDC fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
NMDC SHARES (4.2/5)
Therefore it is a 4-star stock
★ ★ ★ ★ ☆
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|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ★ ★|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ★ ☆|
|Cash Flow Ratios||★ ★ ★ ★ ★|
|Liquidity & Solvency||★ ★ ★ ★ ★|
|Efficiency Ratios||★ ★ ★ ☆ ☆|
|Valuation Ratios||★ ★ ★ ☆ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ★|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)