NMDC’s dividend: now you see it, now you don’t

Some board meetings are routine affairs, such as ones held to declare a dividend. NMDC Ltd’s investors won’t agree with that view, not after their company’s board rejected a dividend proposal. That unusual outcome was perhaps why its shares fell by 6.5% on Monday. Of course, metal stocks were down too, with the BSE Metal index falling by 2.7% but NMDC fell by much more. A fall in global iron ore prices may be another worry on investors’ minds.

This is the season for public sector companies to declare interim dividends, adding to the government’s revenue before the fiscal year closes. In March 2017, NMDC had declared an interim dividend of Rs4.15 per share and shareholders could have expected something in that range or a little more.

Usually, companies refrain from paying a dividend when they feel the need to conserve cash. If that was the case, why NMDC proposed a dividend only to have the board shoot it down is not clear.

Why did the company’s board feel the need to conserve cash? For one, the financial performance in the third quarter was affected by a fall of 20% in its iron ore sales, as rail despatches were disrupted due to an accident. Although the December quarter output declined, higher ore prices and lower expenses ensured that profits still increased. Of course, the increase was much lower than if the company’s sales had been normal.

The current quarter has seen it recover but only just, with January-February output up by 5.7% from a year ago but sales still down by 3%. Domestic iron ore prices are coming off their highs, and NMDC too lowered prices this month. Improving supply position in Odisha is likely to keep the pressure on prices.

News on the global front is not good either, with Chinese iron ore prices declining due to a build-up in stocks combined with fears that demand from the construction sector may be lower than expected. This decline could reverse as well if China’s economic data signals otherwise in the coming months. While domestic prices are not synced with global prices, the prospect of cheaper imports could put pressure on domestic prices. This is a risk that needs to be watched.

Since NMDC’s performance in the second half is not as strong as it could have been, the board may have wanted to be conservative. The company has a significant capital expenditure programme too. As of 30 September, it had a cash and bank balance of Rs5,624 crore.

NMDC is implementing a project to build a three-million-tonne steel plant, and has other capital investment plans including setting up steel plants through the special purpose vehicle route.

In addition, it plans to substantially expand its own iron ore mining capacity to grow its core business. When the steel plant is commissioned, it will also require working capital funding, while the increase in depreciation after the plant starts will also affect profitability till operations stabilize.

Perhaps, the demands on its resources meant that an interim dividend at this point was not feasible. Also, it intends to sell the three-million-tonne steel plant through a disinvestment process, which can release significant cash back to the company. Even if that does not happen soon, once it closes its books for the year, it can always pay a final dividend, taking into account developments till that date.

There may have been valid reasons for NMDC to not declare an interim dividend. But announcing it and then getting it rejected by the board does not send the right signal. That is the message investors are sending by marking down its shares.livemint