NMDC Steel Ltd Upgraded to Sell on Technical Improvements Despite Lingering Fundamental Concerns

Quality Assessment: Weak Fundamentals Persist

NMDC Steel’s quality rating remains subdued due to persistent fundamental challenges. The company’s long-term Return on Capital Employed (ROCE) stands at a concerning 0%, signalling an inability to generate adequate returns on invested capital. This is compounded by a steep decline in operating profit, which has contracted at an annualised rate of -37.79% over the past five years. Such a trend highlights structural issues in operational efficiency and profitability.

Moreover, the company’s debt servicing capacity is under strain, with a Debt to EBITDA ratio of -1.00 times, indicating negative EBITDA and raising questions about financial sustainability. This negative EBITDA status also flags elevated risk, as the firm struggles to generate positive earnings before interest, taxes, depreciation, and amortisation. Despite these challenges, NMDC Steel has reported positive quarterly results for three consecutive quarters, with net sales in Q2 FY25-26 reaching ₹3,389.90 crores, a robust 37.7% increase compared to the previous four-quarter average. However, this short-term improvement has yet to translate into a turnaround in profitability or long-term growth prospects.

Valuation: Risky Trading Levels Amid Profit Declines

The valuation of NMDC Steel remains unattractive relative to its historical averages. The stock is trading at levels considered risky given the company’s deteriorating profit margins. Over the past year, while the stock price has delivered an 11.10% return, net profits have plunged by 52%, underscoring a disconnect between market pricing and underlying earnings performance. This divergence suggests that investors may be pricing in potential recovery or speculative interest rather than fundamental strength.

From a market capitalisation perspective, NMDC Steel holds a modest grade of 3, reflecting its mid-tier status within the ferrous metals sector. The company’s 52-week price range of ₹28.35 to ₹49.62 places the current price of ₹42.83 closer to the upper end, indicating some price resilience despite fundamental headwinds.

Financial Trend: Mixed Signals with Positive Quarterly Sales Growth

Financially, NMDC Steel presents a mixed picture. The recent quarterly performance has been encouraging, with net sales surging by 37.7% in Q2 FY25-26 compared to the previous four-quarter average. This growth is a positive sign amid a challenging industry backdrop. However, the company’s profitability metrics tell a different story. The negative EBITDA and declining operating profits over the medium term highlight ongoing operational difficulties.

Institutional investors hold a significant 20.48% stake in the company, suggesting confidence from well-resourced market participants who typically conduct thorough fundamental analysis. This institutional backing may provide some stability and support for the stock price, even as fundamental concerns linger.

Technical Analysis: Shift to Mildly Bullish Momentum Spurs Upgrade

The primary catalyst for the upgrade from Strong Sell to Sell is the improvement in technical indicators. The technical trend has shifted from sideways to mildly bullish, signalling a potential positive momentum in the near term. Key technical metrics reveal a nuanced picture:

• MACD: Both weekly and monthly readings remain mildly bearish, indicating some caution in momentum.


• RSI: Weekly and monthly Relative Strength Index readings show no clear signal, suggesting a neutral momentum stance.


• Bollinger Bands: Weekly bands indicate sideways movement, while monthly bands remain bearish, reflecting volatility and uncertainty.


• Moving Averages: Daily moving averages have turned bullish, supporting the recent price gains.


• KST (Know Sure Thing): Weekly KST is bullish, reinforcing short-term positive momentum.


• Dow Theory: Weekly and monthly trends remain mildly bearish, indicating that broader trend confirmation is still pending.


• On-Balance Volume (OBV): Weekly OBV shows no clear trend, but monthly OBV is bullish, suggesting accumulation over a longer horizon.

These mixed technical signals have nonetheless improved the overall technical grade, justifying the upgrade in the investment rating. The stock’s recent price action, with a close at ₹42.83 and a day high of ₹43.00, reflects this mild bullishness. Over the past week, NMDC Steel has outperformed the Sensex with an 8.24% return versus the benchmark’s 0.53%, and over the past month, it has gained 2.76% while the Sensex declined by 3.17%. Year-to-date, the stock’s return of -3.23% is marginally better than the Sensex’s -3.37%, and over one year, it has outpaced the index with an 11.10% gain compared to 8.49% for the Sensex.

Comparative Performance and Sector Context

Within the ferrous metals sector, NMDC Steel’s performance is modest. The sector itself faces cyclical pressures from raw material costs and global demand fluctuations. The company’s Mojo Score stands at 39.0, with a Mojo Grade of Sell, reflecting cautious optimism tempered by fundamental weaknesses. The previous grade was Strong Sell, indicating that the upgrade is a step towards recognising technical improvements rather than a fundamental turnaround.

Investor Takeaway: Cautious Optimism Amid Structural Risks

Investors should approach NMDC Steel with cautious optimism. The upgrade to Sell from Strong Sell reflects improved technical momentum, which may offer short-term trading opportunities. However, the company’s weak long-term fundamentals, including zero ROCE, negative EBITDA, and declining operating profits, remain significant concerns. The stock’s valuation appears stretched relative to earnings performance, and the high debt burden adds financial risk.

Institutional interest and positive quarterly sales growth provide some support, but the overall outlook suggests that NMDC Steel is not yet positioned for a sustained recovery. Investors seeking exposure to the ferrous metals sector may wish to consider alternative stocks with stronger fundamental profiles and more favourable valuations.

In summary, while technical indicators have improved sufficiently to warrant a rating upgrade, the fundamental and valuation parameters continue to weigh heavily on the stock’s investment appeal. Monitoring upcoming quarterly results and broader sector trends will be critical for reassessing the company’s prospects going forward.

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