NMDC FPO premium over global peers justified: RBS

In an interview with CNBC-TV18, Brijesh Mehra, Country Coverage Head, RBS, spoke on National Mineral Development Corporation (NMDC) follow-on public offer (FPO).

Here is a verbatim transcript of an exclusive interview with Brijesh Mehra on CNBC-TV18. Also watch the accompanying video.

Q: Everybody concedes that NMDC is a strong asset and as a priced iron ore asset, the criticism which has come from many people from the buy and the sell side over the last couple of days is that it might have been priced too expensively. How would you defend that criticism?

A: The pricing of an issue has a host of factors attached to it. Unfortunately, each company is unique in its business model because while we use comparables as proxies to look at stock prices, each company is unique. NMDC has a few unique features to its investment story.

It is amongst the largest company in Asia. It has an excellent quality of output. It feeds a substantial part of the growing need of raw material for India in the Indian economy and in the Indian infrastructure in particular.

Therefore, given just the size and the scale of the company, it is a stock that is a must have stock. In the past there is very little free float under 1.6%. This issue will allow for greater participation and liquidity in the stock to participate in a very strong underlying business case.

Q: Given the strengths that you spoke about, does NMDC deserve to be doing an IPO at several times the valuation multiples that its global peers trade at that. This is surprising a lot of people. Global investors have the option of buying iron ore companies which are bigger than NMDC albeit with small qualitative differences, but the valuation differential is disparate. You are talking about two-three times the price to book, two-three times the price earnings multiples, a small 20-30-40% premium might have been understandable but the valuation gap with peers, global large peers is just too large.

A: If you are going to go down the route of just clinically comparing with global compass then one could even argue that why even have a 20-30-40% premium to the local market and some of this is judgemental. While NMDC in some of the metrics is valued a little more on a premium to its global peers, its business model and the market it is addressing are quite different in terms of sort of the overall cake in the pie to some of the global peers. We keep taking names of very large companies. They serve the world which is a mixture of developed markets where growth is in small percentages. Markets in India and to some extent China, which NMDC serves the growth rates, are far more spectacular.

While it is easy to draw both ways comparable saying that this maybe too expensive or cheap, I think it is the individual case that needs to be looked at. Apart from Sesa Goa, I think there is no other meaningful stock in this space for investors to own, investors that want exposure to India or to Indian infrastructure. I think the forward growth profile of the company which has been articulated in various memoranda is fairly unique compared to some of the global peers that you have talked about.

Q: Let us talk about a couple of specific issues with NMDC and not benchmark it against anyone. I am just reading from a couple of research reports on the company. NMDC’s 9% production CAGR has lagged India’s overall production. It now mines only 13% of India’s ore versus 20% in 1999. The target that the management has set out for us of about 50 million tonne is dependent on four new mines. Mining leases are awaited for two of them. There is ongoing litigation which is the Kumaraswamy mine. This is not comparable with global peers. How does that set NMDC apart?

A: We can get into very specifics. We can go into a fair amount of research that there are the global peers also which have issues in terms of mining contracts or mining leases and the various stages of approval that various mining leases are in.

Mining is very closely watched in India. Therefore, there are a couple of very rigorous steps that are followed so that the issues of all stakeholders are addressed. To pick at a particular point in time, mining lease profile of any mining company. It is closely watched in the world. So it is perhaps not necessarily giving the full picture.

NMDC is such a large player. In any large player with a dominant market share when new entrants come in, its relative market share tends to fall. However, the underlying growth in NMDC still remains fairly strong and robust and the outlook for the company and its business in terms of growth and capturing the India infrastructure story remains.

Q: As a banker to the issue, how much weightage did you give to the average trading price of NMDC in the market over the last three months? Other bankers and the management have alluded to the fact that it is being done at a considerable discount to the ruling market price. Did you give a lot of weightage to that?

A: In pricing of any issue on IPO or FPO or qualified institutional placement (QIP) or any instrument equity or otherwise, there are a host of factors that go into it. The current stock price, you people have alluded to comparables, the underlying investors or the underlying business case all these are factors that go into price. The current market conditions and outlook for the sector certainly go into the pricing of any issue.

Coming specifically to the stock price of NMDC over the last couple of months, I think it is well established fact that the relative free float or percentage free float of NMDC is very small. This makes it difficult for institutional investors to participate in the NMDC story. It is a proxy for the India economic story or the India infrastructure story. So certainly the current trading price was an input in terms of arriving at the eventual proposed price.

Q: How important input it was because that would seem like slightly spurious logic at pricing it. I admit that you do take the current market price into context but then valuations for the company could be a whole other deal. How important was this current market price while pricing NMDC which also seem to be a huge generator in terms of retail interest, etc. for government offerings?

A: When we started out this discussion a couple of minutes ago, we were talking about overpriced, now we were talking about underpriced. It was certainly a factor in a component that went into the overall assessment to arrive at a pricing range.

It was not the only factor. It is an important factor and there are five-six factors now. Unfortunately, typically you don’t have models, sometimes you do and it will probably a little bit difficult for us to share models with you guys at this forum but certainly yes it was a factor in terms of the valuation or the recommendation of where the price should be.

Q: Issue has been open for more than an hour now. Can you give us some early details of interest on what you have seen today?

A: Unfortunately not. I am sure in a couple of hours we will be able to provide you something.