NMDC – FPO Analysis

As the Sensex has surpassed the 19,000 mark and is trading well above it, many Indian companies willing to raise funds are queuing up with Initial Public Offers (IPO). The Government of India (GoI) is also acting towards its Rs 30,000 disinvestment plan and has come up with a follow-on public offer (FPO) of NMDC. The government has decided a price band of Rs 145-150 per share for its stake sale of 10% in the company on Wednesday, December 11, with the intention of raising funds up to Rs 5,947 crore. The disinvestment in NMDC will be just the second such move by the government in the current financial year due to the subdued sentiment in the domestic stock market.

Established in 1958, the PSU firm NMDC is India's largest iron ore producer with approximate market share of 40% in the domestic market. The company has high grade iron ore mines in Bailadila (Chhattisgarh) and Donimalai (Karnataka). Along with iron ore, it also explores copper, limestone, gypsum, magnesite, diamond, tin, tungsten and graphite.

Interestingly, NMDC is one of the lowest cost producers of iron ore on account of its highly mechanised mines and logistical efficiency. Due to high mechanisation, the company does not have the problem of high employee costs like other PSUs. This, coupled with high quality iron ore, helped it to command almost 55% net profit margin during FY12.

Further, NMDC has aimed to increase its production capacity to 48 million tonnes by FY15E from the current 30 million tonnes by increasing exploration activity in its existing mines and by developing new mines. Despite huge capital expenditure, the company's cash balance and cash equivalent increased to Rs 20,264 crore in FY12, marking a consistent increase over the last decade (from Rs 716 crore in FY03). Moreover, it has also a strong intention to diversify vertically and enter into value-added projects such as steel and pallet plants. Accordingly, NMDC has allocated almost Rs 15,500 crore to build a 3 million tonne steel plant in Chhattisgarh.

A recent disinvestment in Hindustan Copper (HCL) by GoI exhibited poor attraction for the retail investors and had to be rescued by the state-owned LIC at the last moment despite a 41% discount offered for this issue. For the NMDC issue though, GoI is offering only a discount of 3.07% to 6.3% at the closing price of Tuesday, December 10th (Rs 154.75). NMDC is a debt-free company and is stronger as compared to HCL. Despite the fact that GoI has defered its plans of divestment of SAIL, RINL and Nalco recently due to valuation concerns, we believe that the NMDC FPO in unlikely to face such hurdles.

The moot question is whether one should invest in the FPO or not.

On the valuations front, NMDC’s FPO looks attractive. Considering the FY12 earnings per share, the price-to-earnings ratio comes out to be 7.91x and 8.18x for the lower and upper band. Also, the company's share was quoting at just 3.99x EV/EBITDA as at the end of FY12. In addition, it has a competitive advantage over other mining companies on account of its huge reserves, stupendous net margins, lowest cost of production, high iron ore quality, its market leadership in domestic market and a huge cash balance.

The case for an investment in the issue is, therefore, attractive vis-à-vis its peers.