Angel Broking advises 'avoid' on NMDC FPO issue

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS NMDC may settle around Rs 300-320 post issue: SP Tulsian NMDC expects 50 million tonne mining output in FY11 NMDC FPO price band at Rs 300-350/sh; stk dips 6% BSE | NSE 01/01/70 Are Mutual Funds betting on ?

In an interview with CNBC-TV18, Paresh Jain, Research Analyst at Angel Broking, spoke about his outlook on National Mineral Development Corporation (NMDC) follow-on public offer (FPO).

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

Q: Your report begins with the statement that you would look at the fair valuation for NMDC at Rs 225 per share. Are you not advising a buy at Angel?

A: We are clearly advising avoid on the issue primarily for the reasons that have been well discussed by the anchor.

Q: How would you compare the valuations of NMDC with Sesa Goa?

A: Sesa Goa is currently trading at something like 8 times EV EBITDA FY11 earnings. Based on our estimates NMDC is going to trade something like 12-13 times which is a 50-60% premium over Sesa, which we think is slightly on the higher side.

Secondly, specifically on Sesa Goa also we have our reduce rating only because eight times one year forward is currently on the higher side from mining company like Sesa Goa, we would be comfortable with valuation of something like five-six times FY11. So 20-30% discount can be justified but 50-60% discount is on the higher side.

Q: There are couple of reports which say that it has lower risk because most of its output is sold to Indian companies. Secondly, the quality of reserves is much higher. Some say you cannot quantify the quality of reserves which it has plus the fact that as of now government holds about 99 %. So it will still be a crown jewel as far as the PSU companies are concerned and institutions may want to hold that and may not mind paying the sharp premium, Do you think in that sense won't retail benefit by participating in an issue like this?

A: Definitely NMDC is the largest iron ore producer. It has the highest of reserves around 60-65% and costs are very low because of the freight advantage. I think most of the production is in the domestic market is about 85%. At this point of time selling iron ore is not at all an issue because all the steel majors are scouting for iron ore mines and they do want iron ore.

The issues is that from 30 million tonne to 50 million tonne, the ramp up, the execution risk that is associated with it, plus four of their mines are still not operating and two-three of them are yet to receive the environmental clearance. So all of those things when you factor in and the management is saying 50 million tonnne by FY14. So a premium of 50% looks slightly on the higher side.

Q: So you would advise buying in the secondary market after listing closer to that Rs 225 price?

A: Yes if it comes there.