NMDC Shares: Stock Surges 10% After Q1 Result; Demerger To Boost Cash Flows

NMDC Shares: The company’s upcoming three-million-tonne steel plant in Nagarnar, Chhattisgarh, has been delayed and the demerger is expected to reduce the stress on its parent company’s balance sheet.

Even as NMDC’s first-quarter results were badly impacted by Covid-19 induced lockdown, the company’s decision to demerge its upcoming steel unit in Chhattisgarh aided the shares to surge 10% on the BSE in early trade on Friday.  NMDC, a national mineral producer, informed the investors that the board has approved the demerger of NMDC Iron & Steel Plant. The demerger of the steel plant is expected to take off the pressure on its parent company’s balance sheet. The company’s upcoming three-million-tonne steel plant in Nagarnar, Chhattisgarh, has been delayed, and expected to be commissioned next year. The move may lead to significant value unlocking for NMDC. “If pursued in a time-bound manner, this can lead to separate avenues of fund-raising for the government of India, and allowing free-cash-flow yield and correspondingly the dividend yield of NMDC to increase substantially," as per the ICICI Securities in a client note. As per the business daily Mint, NMDC has been spending on construction of the plant from its internal accruals but the additional funding from now would be funded by the demerged entity. In its recent result, the company’s consolidated net profit dwindled over 54 per cent to Rs 531.35 crore in the first quarter of FY21 as against Rs 1,178 crore net profit during the same quarter a year ago. The covid-19 outbreak took a toll on its operations during the quarter, as a result, the company ended up making a loss of around 18.23 LT of production and 23.94 LT of Sales of Iron Ore. The company has slashed the iron ore prices for some time to spruce up sales. This further led to a decline in realizations per tonne by about 18 per cent y-o-y. Lower prices and offtake impacted the operating leverage. NMDC’s Ebitda per tonne stood at Rs1,200 per tonne in Q1, which is among its lowest in the last several quarters. The costs were muted during the quarter for the company. However, the stock prices witnessed a 27% jump in the last one month hinting at the expanding stock’s valuations.