Avoid NMDC FPO, says Angel Broking

NMDC BSE | NSE 09/02/12 Are Mutual Funds betting on NMDC?

Angel Broking has come out with a research note on NMDC 's follow-on public offer (FPO). The broking firm has recommended an avoid on the FPO.

The 33,22,43,200 equity shares follow-on public offer of NMDC will close on March 12. The price band is at Rs 300-350 per share and the offer shall constitute upto 8.38% of the post offer paid-up equity share capital of the company.

The report says, "NMDC is India's leading iron ore producer and enjoys the benefits of huge iron ore reserves, high grade ore and lower costs. Moreover, NMDC's plans of diversifying its operations by moving downstream, expansion of mines and the upcoming contract negotiation augur well for the company going ahead."

"At the lower price band, NMDC will trade at 12.6x and 9.6x FY2011E and FY2012E EV/EBITDA, while at the upper band it will trade at 15.1x and 11.5x its FY2011E and FY2012E EV/EBITDA. In comparison to its domestic peer, Sesa Goa (only listed domestic iron ore company), which is trading at 7.6x and 6.2x FY2011E and FY2012E EV/EBITDA, we feel that the FPO is overpriced. Recent corporate acquisitions in the Indian iron ore space, viz. Sesa Goa acquiring Dempo in 2009 and Vedanta Resources acquiring controlling stake in Sesa Goa in 2007, were executed in the range of 5-10x EV/tonne. Thus, on the EV/tonne premises too, NMDC is trading expensive in the range of 19-22x at the given price band," according to Angel Broking.

The report also sayd, "Even compared to global peers, the NMDC FPO is expensive at the given price range. While global miners like BHP Billiton, Rio Tinto and Vale are trading in the multiples of 7-10x FY2011E EV/EBITDA and 6-7x FY2012E EV/EBITDA respectively, pure iron ore players like Kumba and FMG are trading at 8-9x FY2011E EV/EBITDA and around 6x FY2012E EV/EBITDA, respectively."

"We recommend an Avoid on the FPO, as at the lower price band the stock will trade at EV/EBITDA of 12.6x and 9.6x FY2011E and FY2012E, which is at a significant premium to its peers."

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