A Metal Stock to Watch Out for

From the lows of Mar 24, 2020, the Nifty Metal Index has rallied almost 150%. Even though the Metal Stocks had cooled down in the middle, they are back in their groove. 

Last week, shares of non-ferrous and ferrous metal companies rose. The Nifty Metal index jumped nearly 5% in one day, its highest one-day increase in recent months.

Why is Steel the most important Metal?

After crude oil, steel is the world's second-largest commodity. In terms of tons, it is 15 times the size of all other metals markets combined. It is utilized to make our roads, bridges, buildings, autos, and other structures. Steel is a globally traded commodity with similar pricing due to low transportation costs. Its pricing, however, is not governed by global supply and demand dynamics.

Factors for the rally in Metal Stocks

China Factor

As of 2020, China produces 55% of world steel capacity. China is by far the world's largest steel consumer and also the largest producer. The balance between China's domestic production and consumption has had a significant impact on global steel pricing. 

China's net exports have a strong and negative relationship with worldwide steel prices. 

They have a significant cost advantage because of the large economies of scale, cheap access to raw materials, and government support in the form of export rebates of up to 13% of sales, among other things.

Steel is made primarily from iron ore. The entire metal rally began as a result of Iron Ore supply disruptions. 

Due to China's early recovery from the pandemic and Beijing's substantial investment in economic stimulus, particularly infrastructure, iron ore was the best-performing commodity in 2020. 

However, China's steel industry is one of the country's top pollutants, accounting for 10% to 20% of the country's carbon emissions. Beijing has set its sights on the industry as part of its effort to cut carbon emissions and achieve net-zero status by 2060.

According to reports, the Chinese government has decided to stop providing incentives to its steel producers to discourage them from exporting. 

In addition, numerous provinces are considering lowering steel manufacturing capacity to meet China's five-year plan's goal of cutting carbon emissions. Both developments are a blessing in disguise for Indian steel producers, as they will enhance global steel prices as well as demand for Indian steel exports.

Aatmanirbhar and Production Linked Incentive Scheme (PLI)

PLI for massive scale Electronics Manufacturing offers a production linked incentive to encourage domestic manufacturing and attract huge investments in cell phone manufacturing and some specified electronic components. The Scheme would tremendously boost the metal sector since there is a specific use of metals in both mobile manufacturing and automobiles. 

India's infrastructure has a bright future. FM granted the infrastructure sector a big boost in Budget 2021 by increasing the finances. Steel companies will benefit largely as a result of this.

Contribution of Other Metals

The most significant increases in lead and nickel pricing were due to increased demand from the electric vehicle (EV) industry. With Tesla Inc betting on future orders, nickel prices soared to seven-year highs. Base metals rose as supply fears from China's floods.

Excellent performance by several Metal Stocks in India

Tata Steel (NS:TISC)'s revenue increased by 5% in FY21. The outside India section witnessed a 20% growth in revenue, while the India segment saw a 5% revenue. Demand in Europe is very strong, while demand in India is improving. Demand is increasing in non-European areas, which will enhance Tata Steel's revenues even further. 

Revenues of Jindal Steel & Power (NS:JNSP) increased by 28% in FY21. Revenue from operations increased by 25%. Jindal Steel and Power has stated that its power division will be separated from its steel business. As a result, the stock will become even more appealing. When we start attributing steel multiples to Jindal Steel and Power, the long-term potential increases drastically.

All of this, combined with China's export prohibition, will benefit not only steel businesses but also aluminium producers such as Hindalco and Nalco. 

As a result, India's metal industry has a bright future.

NMDC Limited (National Mineral Development Corporation)

About the company

It is a mineral producer owned by the government and administered by the Ministry of Steel. NMDC is India’s largest producer and exporter of iron ore. It also runs the country's only mechanized diamond mine. NMDC Ltd (NS:NMDC). is diversified into other raw materials for the steel industry such as low silica limestone, dead burnt magnesite, and further value additions are under study through its subsidiaries.

The company is also diversifying into steelmaking and has embarked on various capital-intensive projects to modernize and expand capabilities to maintain its local leadership, as well as effectively foraying into international markets.

Why did NMDC underperform in the previous years?

NMDC is a PSU and the policy undertaken by PSUs is hardly monitored and improved. The public is rarely informed about the policy changes. Before the metal rally, it was considered more of a commodity-exporting business and had less growth in the future. There was a poor allocation of the capital and also the dividend was reduced. The corporate governance of the company was pretty bad. ESG plays a huge role in the metal sector because they are polluting industries. Also, it is a cyclical stock.

NMDC’s productions have surged up drastically

From 2.19 million tonnes (MT) in July 2020, NMDC's production increased by 39.72% to 3.06 million tonnes (MT) in July 2021. NMDC's iron ore sales increased 28.01%, 3.29 MT in July 2021 from 2.57 MT in July 2020. This shows the positive growth that has already started in the NMDC. They are also planning to expand their capacity due to which the productions will further increase.  
NMDC is almost a net debt-free company (Cash = Borrowings)

The company’s borrowing is very limited which is a very good sign for a growing company. Any profits the company earns will be either used for further investment for growth or distributed as dividends. If they continue to maintain this they can see much bigger growth. When compared to bigger steel companies like Tata and JSW Steel (NS:JSTL) whose borrowings are huge, NMDC scores a higher point due to lesser borrowings. 

NMDC’s cash flow from operations has more than doubled

The cash flow from the operation (CFO) is like life to the organization. It indicates the amount of cash generated by the normal operations of the business. This has been great for NMDC. Their CFO has increased from Rs. 2126 in FY 20 to Rs. 7266 in FY 21. When compared to JSW steel even though their CFO has increased it’s not as great as NMDC.

NMDC’s board had approved for demerger

NMDC’s board has approved the demerger of NMDC and NMDC Steel. This could unlock a huge value for the steel plant. 

The Indian government has laid forth a plan to increase steel production to 300 million tonnes per annum (MTPA) by 2025. Green-field steel plants are being encouraged through Special Purpose Vehicles (SPVs) in mineral-rich states like Chhattisgarh, Jharkhand, and Odisha to help realize this ambition. 

NMDC is building a greenfield integrated steel mill in Nagamar, Chhattisgarh, with a capacity of 3 MTPA. It has made substantial improvements over the other steel SPVs. 

NMDC is therefore considering a suggested demerger proposal to provide more value to the company's stakeholders by separating NISP (Iron and Steel Plant).

NMDC’s valuation

The P/E of the stock is around 8.41 whereas the industry P/E is around17.5. which indicates the company is undervalued and still has a lot of potentials to indicate the earnings in its price. When compared to Tata Steel, which has a P/E of 22.2 and JSW steel with a P/E of 11.5, NMDC still has a lot of potentials to showcase in the price. 

NMDC’s fundamentals are good 

With the new chairman in action, it has given more importance to the ESG factors. They are improving their corporate governance, they are trying to reduce their carbon footprint, and are also being socially responsible and increasing their CSR activities. 

Their fundamentals are also improving year on year. The Return on Equity is 21.8%.l; the RoA is 18.4%.

The company has delivered good profit growth of 19.78% over the last 5 years. The expenses are also in place and not increasing too much year on year.

Most of the other fundamentals also look great for the company.

NMDC has been maintaining good dividend pay-out

NMDC has been maintaining a good dividend payout ratio for the last few years. It has been maintaining a healthy dividend payout of 39.39%, which means almost 40% of its profits are dedicated to dividends. With the continued good performance quarter on quarter, it can provide better dividends. It has also maintained a good dividend yield at 
4.31%.

An investment in NMDC can be a good income-generating tool as well.

Board Meeting

A board meeting has been set for discussion of the financial results of the quarter on Aug 12th, 2021.

Ending Note

India's infrastructure has a bright future. FM gave infrastructure a major boost in Budget 2021. These will supplement current infrastructure financing choices and may pave the path for a greater private engagement, thereby strengthening overall infrastructure spending.

China reducing its exposure to Steel production will act as a boon for India’s steel companies.

NMDC has an experienced set of directors and board members. The company’s good fundamentals, the demerger of the Steel plant, disinvestment from the government, almost a debt-free company, maintaining good dividend payout, all of these will add up to provide great results and growth.
  
Disclaimer: The above analysis is only for educational purposes. Kindly do not treat this as a recommendation to buy/sell the stock. Consult a SEBI Registered Investment Adviser before investing. Do not rely on unqualified stock tips for investing your hard-earned money.