Stock is trading at an attractive valuations 5.5 times its FY19 estimated enterprise value to EBITDA and 1.5 times its book value
The state-owned NMDC, which is the largest iron ore mining company, has seen its share prices tumble in the recent past as investors worry about the supply of iron ore in the domestic market with the government gradually lifting iron ore mining ban in Karnataka. That apart, in December 2017 quarter, the company reported 20 percent year-on-year decline in volumes to 8.1 million tonne as a result of disruption of railway lines. On top of that, there is marginal pressure on iron ore prices internationally. Chinese iron ore prices have dropped to around USD 75 a tonne as against USD 79-80 tonne seen in January this year.
What is in the price?
Thanks to these worries, the stock is trading at an attractive valuation of 5.5 times its FY19 estimated enterprise value to EBITDA and 1.5 times its book value. At current market price, it is offering a dividend yield of over 4 percent.
Moreover, market is not ascribing much value to its investment of close to Rs 13,000 crore (on a market capitalisation of Rs 39,200 crore) in building the 3-million tonne steel plant, which will be operational by the end of September 2018. The company is hopeful of divesting these assets and intends to focus on its core iron ore business, which is far more remunerative and makes better returns on investments.
Besides, the company recently completed buyback of 20.2 percent equity at Rs 94 a share (current market price Rs 124) which would be earnings accretive and benefit of the same will be reflected in the coming years.
Improving business environment
Coming back to business, what is interesting is that over and above Rs 200-300 per tonne price hike (hike by 13 percent) taken by NMDC in December 2017 it has raised iron ore prices in January 2018 by about Rs 500 a tonne. Effectively, even though NMDC took a 3 percent cut in iron ore prices very recently, it was relatively very small and realisations would still remain high.
The other important aspect of this is that even if there is some pricing pressure, large part of this would be offset as a result of increase in overall production volumes. The railway lines are restored and company is hopeful of production improving further in March quarter. In the current financial year, the company is aiming to produce close to 36 million tonnes and take it further to 38-39 million tonnes in FY19, which is an increase of about 10 percent.
This comes at time when industry is facing challenges. In December 2017, six private mines in Odisha with rated iron ore capacity of around 23 million tonnes were closed due to non-payment of compensation to the state government leading to supply cut. The crisis in Odisha would only escalate in the coming years.
“There is likelihood of production disruption of 67 million tonne in FY20 when current licences of private iron ore mines in Odisha expire and bidding commences,” said Amit Dixit, who is tracking the sector at Edelweiss Securities.This is far bigger a threat and could possibly compensate for the increasing production in Karnataka as a result of removing curb on high grade mines.