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NMDC Follow on offer: Our view - Views on News from Equitymaster

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NMDC Follow on offer: Our view
Dec 12, 2012

The government is all set to sell its stake in National Mineral Development Corporation (NMDC) to meet its Rs 300 bn disinvestment plan for the current fiscal year. NMDC was incorporated in 1958, as a Government of India fully owned public enterprise. It is under the administrative control of the Ministry of Steel, Government of India. NMDC is India's largest iron ore producer and exporter, presently producing about 27 million tonne (MT) of iron ore from its 3 fully mechanized mines viz., Bailadila Deposit-14/11C, Bailadila Deposit-5, 10/11A (Chhattisgarh State) and Donimalai Iron Ore Mines in Karnataka. It has the only mechanized diamond mine in the country with a capacity of 0.1 m carats per annum at Panna (Madhya Pradesh State).

NMDC is one of the low cost producers of Iron Ore in the World, with an average cost of production of USD $17/tonne (Rs 8.57 bn) in FY12. NMDC's low cost production is due to its highly mechanized mines i.e. open cast mines, low mining cost on account of its high grade iron ore reserves with Fe content of more than 64% and inexpensive labor. In addition to this, NMDC's mine allows it to take the benefit from scale of operations and has the access to efficient logistics, which in return saves the company's cost. Currently, the EBITDA Margin of NMDC is 79% as compared to the average EBITDA Margin of 47% of its international players and 42% of its only domestic iron ore player like Sesa Goa.

The stock, which had broadly tracked the BSE-Sensex since end-2012, has corrected more than 17% since the high closing of Rs 193.15 on October 3, 2012. In sharp contrast to the roughly 10% gains in the BSE-Sensex. While the under-performance is due to concerns on mining volumes, delayed expansion and lower realisations, a part of it is also due to hangover of the FPO. However, now the volume outlook is improving with gains expected from FY14 onwards, given the ongoing capacity expansion. The mining curbs in various states in the country are also leading to better pricing power for legitimate miners such as NMDC.

Issue details

The FPO comprises an offer for sale (OFS) of 396 m equity shares of face value Rs 1 each. There is no fresh issue of equity. NMDC has fixed the issue price band at Rs 145-150 per share. The OFS would take place through a separate window of stock exchange (Bidding) on 12th December, 2012 from 9.15 am to 3.30 pm. The price set is at a discount of 7.7% at the closing price on 11th December, 2012. If fully subscribed, the government would get Rs 58.26 bn through this stake sale.

The stock is trading at a P/E of 8.6 and a P/BV of 2.6. A strong balance sheet, presence in sellers market (iron ore), low cost of production, high-grade mines and long mine life make NMDC an attractive bet in our view. Hence we recommend investors to Apply to the issue.

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