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The Broken Moat

NMDC is down 26% since we last featured it in Wealth Insight. We try to find out the reason why…

The fifth anniversary issue of Wealth Insight last year featured 13 companies with moat. Since then, 10 of these companies have beaten the Sensex, that too by a wide margin. But that is not the reason I have initiated this work. Out of the remaining three, Larsen & Toubro is marginally down which is not that worrisome as yet. But the major cause of concern is the only PSU in that list – NMDC, which is down by more than 26 per cent since we featured it.

Has NMDC lost its moat or it got victimised for being a PSU? Both the reasons are responsible to some extent. The company still has got the moat; it is only that the breadth of moat that has narrowed down. To be precise, the industry-specific issues have pared down the revenues of NMDC. Top-line growth since last financial year has remained flat despite the high prices of the iron ore in FY-12 globally. The problem arose due to low demand, especially in China which is one of the largest importers of iron ore from India. Another reason was when mining was stalled due to a scam in Karnataka. Although mining resumed shortly after the Supreme Court order, the stock price hasn’t recovered yet. Another important factor that went against the recovery was the government’s emphasis on social interest, as evident from Coal India and TCI cases in April 2012.

Thus, the economic moat seems to be vanishing for the company due to industry-specific reasons but operationally the company still excels. Despite a marginal fall in the top-line, NMDC still managed to increase its bottom-line. This happened due to the experienced management and the company’s commitment towards the operational efficiency. Once the economic outlook becomes stable, the thrust of steel and iron demand will see NMDC’s revenue rising again. But the question is will the government approach change towards the investors? The next couple of years hold key to this question, as they do for other PSUs too.