NMDC FPO: Centrum says subscribe, Macquarie differs

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NMDC FPO: Centrum says subscribe, Macquarie differs

In an exclusive interview with CNBC-TV18, Rakesh Arora of Macquarie Research Equities and Vishal Jajjo of FCH Centrum Wealth Managers, speak about the NMDC follow-on public offer and give their outlook going forward.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Avoid NMDC FPO, says Angel Broking NMDC FPO opens; should you subscribe? NMDC FPO subscribed 17% on day 1 Won't subscribe to NMDC FPO: Sandeep Madan NMDC BSE | NSE 01/06/12 Are Mutual Funds betting on NMDC?

Q: On this long time point that you made that it's a good business to own in the long-term, we heard similar strains when NHPC was happening, good power story need to bag for the long-term. Even for the NTPC FPO, we heard it is an index stock and therefore people will have to own in, but it evince very lukewarm response from any global institutions, are you sure that NMDC will fly?

Jajjo: In the short-term, it's difficult to comment because one has to look at the size of the FPO, size of the company. But if one considers the fact that whatever projects of steel were announced in the past say by Mittal or Posco, most of them have hit a standstill as of now; firstly on account of lack of government approvals or secondly lack of resources; land is one of the then and the other is the availability of key raw material and the linkages. So considering the fact that NMDC is looking for a business model wherein it is forward integrating, it's planning to set up a steel plant because out of this Rs 26,500 crore of capex what they have planned over the next 5 years, Rs 15,000 crore is allocated towards setting up a steel plant. Though they may extend the deadlines a little bit, but the model seems to be in place.

Q: On this point that Mr Arora raised about what the post issue price may look like, what is your sense of what kind of price this stock may actually settle at?

Jajjo: In the short-term, we are not expecting any decent returns from the IPO. But from a medium to long-term perspective, we don't have a fixed price, but we have a subscribe rating at a price of Rs 300.

Q: Do you think global investors or institutional investors will like the fact that NMDC's eventual game plan is to be steel player or is the charm of NMDC being a large natural resource supplier and it sort of negates some of that by eventually doing that forward integration to becoming steel because in steel you are spoilt for choice and is cyclical?

Arora: You are right if you look at current ROEs of NMDC they are at 30% whereas if you look at SAIL the ROE is 20%, so obviously you become more capital intensive and your return on equity tend to fall. And already as we have discussed that SAIL is trading at lower valuation. So the premium valuation which NMDC currently claims is going to go down in the longer-term also.