Last Updated : Jan 10, 2018 04:04 PM IST | Source:

NMDC share sale: Reasonably priced; favourable business environment a big positive

Importantly what is even more lucrative is that retail investors are offered an additional discount of 5% on the offer price of Rs 153.5 per share.

Jitendra Kumar Gupta @jitendra1929

NMDC’s offer for sale (OFS) could be a good opportunity for investors, especially retail. The state-owned miner is selling 1.5% (an additional 1.5% in case of over subscription) in this OFS.

Retail investors are being offered an additional discount of 5% on the offer price of Rs 153.5 per share. The discounted price of Rs 145.8 per share is roughly 10 times the company’s estimated FY19 earnings in FY19. This is a good price, given NMDC’s debt free status, core RoE (return on equity) in excess of 45% and 4% dividend yield.

Good earning visibility

Moreover, the business environment is good. NMDC is a monopoly in iron ore and is one of the low cost producers in the world. To put in perspective, during the worst crisis in iron ore market when international iron ore prices dropped to less than $40 a tonne in 2016, it was still making profits and distributing generous dividends.

What is interesting is that today the situation is much better as international iron ore prices have recovered to around $70 per tonne and there is strong demand for iron ore locally and globally led by an upswing in the steel cycle.

The company recently hiked prices by about 20%, which should improve margins. That apart, there is a supply crunch in the domestic market, particularly after the closure of few mines in Odisha. At the same time, iron ore demand is increasing, as evident from higher capacity utilization across the industry.

During April to November 2017, India’s finished steel production rose 5.1% on the back of a 4.2% growth in consumption to 56.8 million tonne. Improvement in realisations and higher volumes would mean good earnings visibility.

Forward integration

NMDC has in the past had initiated investments in forward integration; manufacturing steel pellets from the captive iron ore. These projects are in progress and large part of the capital or about Rs 11855 crore, related to these projects, was shown as capital work in progress in FY17.

In fact, one of its 1.2 million tonne pellet plant has commenced operation and 3 million tonne steel manufacturing plant should begin operations by the end of December 2018. Once these facilities are operational, NMDC will report much higher profitability and better return ratios. This would also lead to higher cash flows and dividends in the coming years, thereby making a case for re-rating of the stock.
First Published on Jan 10, 2018 08:23 am
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