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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The follow-on public offer of State-owned miner NMDC opened for subscriptions on Wednesday, comprising of a net offer to the public of 330,500,000 equity shares at face value Re 1 each and a reservation of 1,743,200 equity shares for purchase by eligible employees. The offer would close on March 12, 2010. The price band for the issue has been fixed at Rs 300-350 per share.

Though experts' debate on the issue is still on, consensus on pricing has been reached upon. "It should have been at or below Rs 300 instead of this price band of Rs 300-350," most experts had declared.

Furthering the argument, Rakesh Arora of Macquarie Research Equities said NMDC was the most expensive iron ore stock globally. "We would prefer SAIL over NMDC."

On the other hand, Vishal Jajjo of FCH Centrum Wealth Managers differs in opinion. "NMDC is a good long-term bet," he said, adding that the company is the lowest cost producer globally with the highest margins.

In an exclusive interview with CNBC-TV18, Arora and Jajjo, speak about the issue and give their outlook going forward.

Here is a verbatim transcript of the interview. Also watch the accompanying video.

Q: Even at the lower end of the band Rs 300, do you find justification to bid for NMDC?

Arora: Our target price is Rs 241. At Rs 300, the stock would be trading at 20 times PE on FY11 estimates which makes it one of the most expensive iron ore stock in the world. On resources, the stock would be at around USD 21-22 per tonne which again is 40-50% premium to the global average. We like the company, the assets, but I think valuations are pushing us back.

Q: You have got a subscribe though or be at the Rs 300 end, how would you respond to what Rakesh has just said?

Jajjo: If one looks at this company from the resources point of view as well as the business model in which they are operating and what the entry constraints in the segment in which they are operating are, then it appears to be a lovely long-term bet. The problem with the investors is that they look at the IPOs or the public issues more from the listing perspective. But NMDC is a company which has got a lovely balance sheet; it has got excellent reserves of iron ore in excess of 1.36 billion tonne. If I go by the statistics India produces more than 200 billion tonne of iron ore every year. Out of which more than 110 million is exported, the balance is 90 million tonne and out of which 35 million tonne is meant for captive consumption. So the trading that is happening is in 55 million tonne and NMDC contributes around 27 million tonne of it which is close to 40-50%. It is the lowest cost producer in the world and it has got the highest EBIDTA (Earnings Before Interest, Taxes, Depreciation and Amortization) margins.

Considering the fact that the company's cash rich and it has got expansion plans of Rs 26,500 crore over the next 5 years, one has to remain invested in this company if he believes in the steel story, if he believes in the iron ore story.