NMDC’s fate hangs on outcome of Karnataka mining bill that increases royalty
Source: Live Mint
NMDC Ltd’s shares have declined about 20% since its December high, after the Karnataka (Minerals Rights and Mineral Bearing Land) Tax Bill, 2024, was passed by the state legislative assembly. The bill, pending the governor’s approval, substantially increases the royalty payable by mining companies.
Even though NMDC, the largest iron ore producer in India, can pass on the proposed levy, recovering past dues arising from a retrospective provision in the bill will be a challenge.
Kotak Institutional Equities said the potential increase in taxes would have to be shared between NMDC and steel producers and would not be entirely passed on. While announcing its December quarter (Q3) results, NMDC said it has recognised a contingent liability of ₹13,510.90 crore against the bill.
“The proposed taxes by Karnataka, if fully absorbed by NMDC, would impact FY26 estimated Ebitda 12.6%/43.3% in case it is applied only in Karnataka/across all states,” Kotak’s analysts said in a report on 10 February. The broking firm has not yet built the higher taxes into its base case, pending the final decision.
The contingent liability could mean an impact of ₹15 per share. The sharp drop in NMDC’s shares may have factored-in this uncertainty. The shares closed at ₹67.13 on the BSE on Thursday.
“Given that NMDC’s stock price has already fallen by a similar amount since the announcement of the bill in December, we believe this development is largely factored into the current market price,” Elara Securities (India) said in a 10 February report.
NMDC’s Q3 results were broadly in line, with Ebitda at about ₹2,400 crore, representing an 18% year-on-year growth, almost the same as 17% in H1. Growth in Q3 was supported by both higher realisation, which was up by 15%, and volumes, up 5%.
Ebitda per tonne increased by 13% to ₹2,017. A pick-up in sales volumes, despite lower realisation, is expected to help NMDC report higher Ebitda growth in Q4. After taking a price cut in early January, the company may have to take one more during this quarter.
The management expects production to reach 16 million tonnes in Q4, up from 13.3 million tonnes in the same quarter last year.
NMDC Steel
But that may not be enough to soothe investors’ nerves. NMDC Steel, a demerged entity under management control of NMDC that owes the latter over ₹3,000 crore, continues to make losses. The business faces the challenge of evacuation due to unavailability of rakes, leading to low capacity utilisation and higher cost of production. The company is exploring options of securing rakes from private operators and expects this to start by April.
Further, the management has indicated a steep rise in its capex projection to ₹70,000 crore from ₹50,000 crore earlier for its plan to reach production capacity of 100 million tonnes per annum (mtpa) by FY31. The increase is on account of a plan to build surplus infrastructure to take care of exigencies.
JPMorgan India, in an 11 February report, reduced its price target marginally, revising its net cash estimates following the guidance on elevated capex. The company’s 2 mtpa pellet plant, with the provision of upgrading into 6 mtpa, is expected to be commissioned in 2025. Pelletisation improves net realisation with an improvement in the quality of iron ore.
Against this backdrop, the stock rose about 12% from its 52-week low of ₹59.70 on 13 January, trading at an enterprise value of 5.2x its FY26 estimated Ebitda, as per Bloomberg consensus.
A favourable outcome of the Karnataka mining bill could come as a big relief for the stock.
