India’s state-owned iron ore miner is digging itself into a profitability hole. Higher output can’t compensate for soaring costs and weak pricing power.
NMDC is learning a that in commodities, volume isn’t everything. India’s largest iron ore producer posted impressive production numbers in the December quarter—14.7 million tonnes, up 44% sequentially—yet investors have little to celebrate. Earnings missed estimates, margins contracted, and analysts are slashing price targets.
The stock tells the story. Trading around Rs 82 rupees, NMDC now faces a downgrade to “reduce” from Yes Securities, which cut its target price to Rs 78 rupees from Rs 82. Even the more optimistic Systematix, maintaining a “buy” rating, but lowered its target to Rs 95.
The Royalty Squeeze
NMDC reported EBITDA of 21.4 billion rupees for the third quarter, missing Systematix’s estimate by a painful 17%. The culprit? Soaring costs that volume growth couldn’t outrun. As Systematix notes, “Decline in EBITDA can be partly attributed to higher royalty, paid on iron ore production during the quarter.”
NMDC’s success in boosting production directly inflated its biggest cost item. Royalty payments jumped 37.3% quarter-on-quarter, according to Yes Securities, which observed that margins faced pressure from “a combination of higher royalty payouts (+37.3% QoQ – owing to higher volumes), elevated selling expenses (+40.5% QoQ), and higher employee costs (+10.5% QoQ).”
EBITDA margins shrunk to 28.2% from 36.1% a year earlier—a staggering 794 basis point drop. While higher volumes should bring operating leverage and margin expansion, NMDC instead demonstrated negative operating leverage with costs rising faster than revenues.
Pricing Power Vanishes
NMDC’s average realization was Rs 5,039 per tonne in the quarter, down 6% year-on-year, according to Systematix. Yes Securities reported even weaker realized prices at Rs 4,681 rupees per tonne, down 12.7% annually and 5.9% sequentially.
This pricing deterioration occurred despite India’s steel industry operating at reasonable capacity utilization. “Average realizations remained under pressure on a QoQ basis amid softer domestic iron ore pricing,” Yes Securities explains, adding that this “limited operating leverage” despite strong volume growth.
The company sold 12.7 million tonnes during the quarter, up 18.4% sequentially but only 6.4% year-on-year. Revenue from pellets and other minerals reached 16.6 billion rupees, expanding “9.2x YoY,” notes Systematix, providing some diversification.
Cost Inflation Bites
Strip away royalties and selling expenses, and NMDC’s cost of production stood at 1,773 rupees per tonne—up a whopping 105% year-on-year, though down 7.1% sequentially, according to Systematix. Employee costs per tonne came in at 351 rupees versus 368 rupees a year earlier, offering minimal relief.
The sequential improvement in unit costs provides scant comfort. As Yes Securities notes, “While volumes supported absolute EBITDA growth sequentially, cost pressures and weaker realizations capped margin recovery.” Net profit rose just 3.4% quarter-on-quarter to 17.6 billion rupees while falling 6.7% annually—missing estimates despite the strong volume performance.
NMDC’s cost structure it seems is not t flexible enough to protect margins when prices soften. As a state-owned enterprise with strong unions and political considerations, the company lacks the agility of private-sector peers to cut costs aggressively.
The Expansion
Management remains committed to expanding iron ore capacity to 100 million tonnes by 2030, targeting 68 million tonnes within two years. Systematix reports that “NMDC has applied for and is expecting 13mt EC [environmental clearance] limit enhancement at Deposit 4 and Deposit 13 to achieve the near term target of 68mt.”
India’s steel industry needs domestic iron ore as it pursues ambitious production targets. But does it make financial sense at current margins? Systematix assumes iron ore sales of 51/55/61 million tonnes for FY26/27/28, implying steady growth. Yet the brokerage “moderating FY26/FY27 EBITDA estimates lower by 6% and 5%, respectively” suggests the volume growth comes at the expense of profitability.
Yes Securities is even more cautious, expecting “Revenue, EBITDA and PAT to grow at a CAGR of 8.2%, 7.3% and 4.4% respectively over FY25-28E.”
The Valuation Trap
At first glance, 6 times EV/EBITDA seems cheap for a major iron ore producer. But commodity companies trade on earnings and cash flow, not EBITDA multiples, for good reason: capital intensity and working capital swings matter enormously. NMDC’s profit growth of just 4.4% annually through FY28, per Yes Securities, hardly justifies even modest valuation multiples.
The downgrade to “reduce” from Yes Securities reflects this reality. As the brokerage bluntly states: “While volume momentum is likely to sustain into Q4FY26, meaningful margin expansion remains contingent on iron ore price stability and cost rationalization.”
