Subscribe
to NMDC FPO Issue; Price Band-Rs.300-350
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Sector |
Mining |
Investment
Rationale
Ø
NMDC, 6th largest iron ore mining company in the world
& the largest in Ø
Domestic steel production is expected to
grow to 80.5 million tones by FY 2012 @ CAGR of 13.9%, translating into
higher demand for iron ore. While this ensures volume growth, value growth will be driven by spurt in iron ore prices (~ 40%). Ø
NMDC is diversifying into steel (setting up 3 million tpa integrated plant), steel pelletisation (2 plants of 3.2 million tpa) and merger of Sponge Iron India @ capex of Rs 26,500 crore over next 3-4 years. Ø
Besides, company plans to expand mining activities to other minerals
like coal, fertilizer (rock phosphate & potash) and gold. Thus, company
will emerge as fully integrated entity in metals & mining space. Ø
NMDC is a debt-free company
with strong balance sheet incl. surplus cash of ~ Rs 12,077 crore (Rs.
30/- per share) as on Dec. 31, 2009. Investment Concerns Ø
Disruption of operation due to Naxalite
attacks. Ø
Intense competition from MNCs and private
sector (for captive consumption) Ø
Significant govt. influence on company’s
strategies. Recommendation Ø
NMDC is offering share @ 27-32 times FY 2010 expected EPS of Rs 11/-
and 17-19 times FY 2011 expected EPS of Rs 18/-. Though FY 2010 valuation
looks on higher side, considering increased earning in FY 2011 backed by
higher volumes & spurt in price realization and across the board
excellent strength (financial & operations) of the company, FY 2011 valuation appear reasonable. Hence,
we recommend to “SUBSCRIBE” to the issue. |
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BSE Sensex |
17052.54 |
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Issue Details
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Issue Size |
332,243,200 shares |
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Shares offered to Public |
330,500,000 shares |
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Shares reserved for Retail Investors |
115,675,000 shares |
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Face Value |
Re. 1/- |
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Funds to be raised |
Rs. 11629-9967 crore |
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Issue opens on
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March
10, 2010
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Issue closes on
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March
12, 2010
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Utilisation of Issue Proceeds
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Particulars |
Rs. Crore |
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This being Offer for Sale, Company shall not receive any proceeds of
this Offer and all the proceeds shall be received by Selling Shareholder i.e.
Government of India |
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Shareholding
Pattern (%) |
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Pre Issue |
Post Issue |
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Promoters
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98.38% |
90.00% |
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Others |
1.38% |
1.38% |
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Public |
0.23% |
8.61% |
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Eq. Capital
(Rs. Cr.) |
396.47 |
396.47 |
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As this is Offer for |
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Historical Financial
Information Rs crore
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Standalone Performance |
FY 2008 |
FY 2009 |
% Inc. |
9 mths FY 10 |
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Net Sales |
5,711.31 |
7,564.03 |
32.4% |
4,255.76 |
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EBITDA |
4,340.40 |
5,841.21 |
34.6% |
3,043.36 |
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EBITDA (%) |
76.0% |
77.2% |
|
71.5% |
|
Interest Expenses /
(Income) |
- |
- |
|
- |
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Depreciation |
63.46 |
77.02 |
21.4% |
51.26 |
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P.B.T. |
4,947.47 |
6,648.23 |
34.4% |
3,642.64 |
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Net Profit |
3,250.98 |
4,372.38 |
34.5% |
2,404.59 |
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Equity Capital (Re 1/-) |
396.47 |
396.47 |
|
396.47 |
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Fully Diluted Equity
Capital (Re 1/-) |
396.47 |
396.47 |
|
396.47 |
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Annualised
EPS (Rs) |
8.20 |
11.03 |
|
8.09 |
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Annualised
EPS on fully diluted equity (Rs) |
8.20 |
11.03 |
|
8.09 |
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Book Value (Rs) |
216.10 |
293.28 |
|
344.79 |
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RONW (%) |
37.9% |
37.6% |
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23.5% |
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ROCE (%) |
50.7% |
50.2% |
|
29.7% |
About NMDC
Ø
India's single largest (i.e. 13%
India’s total ion ore production) iron ore producer of and exporter, NMDC
is presently producing ~ 28.5 million tons (in FY 2009) of iron ore from 3
fully mechanized mines – two in Chhattisgarh (Bailadila) and one in Karnataka. It has the only mechanized diamond mine in Ø Owing to large reserves of
high grade (with Fe content > 64%) iron ore,
company is one of the lowest cost
producer of iron ore. Its high grade products
and ore quality gives it strong competitive advantage and helps it to command
premium pricing, stimulate demand for its products & enjoy customer
loyalty. Ø
Company has wide customer
profile. Key customers in domestic market are Rashtriya
Ispat Nigam (Vizag Steel Plant), Essar
Steel, Ispat Industries, JSW Steel and Welspun Maxsteel. These clients
account for > 60% of its total sales. A good
portion of sales is done through long-term
contracts. Key international customers are Japanese (long
term contract), South Korean (long term contract) and Chinese steel
mills (spot basis). While domestic market comprised of 85% of FY 09 sales
volume, exports contributed 15% of FY 09 sales volume. Ø
Apart from iron ore, NMDC is developing Magnesite
mine in |
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Investment
Rationale Ø
Company’s fortunes are closely linked to
growth in While this ensures volume growth, spurt in iron
prices would drive margin expansion. Spot iron ore prices have nearly doubled
from a year ago and are up by about 11% over January 2010. Negotiations for
global 2010 iron ore contracts are expected to see
prices rise by as much as 40-50%. That is good news for NMDC, as its own
long-term contracts for domestic and export markets are expiring in March
2010 and 2011, respectively. At least 90% of its total output is tied in long-term contracts and domestic sales account
for nearly 85% of sales. Domestic prices are linked
to global prices. Ø
NMDC has formulated ambitious strategy to diversify its activities
beyond mining and become a fully integrated entity in metals & mining
space by foraying into areas like infrastructure, energy & fertilizers :- ñ
Infrastructure division will focus on development of steel plants and
mining activities. »
Setting up 3 mtpa
steel plant at Chattisgarh @ capex
of Rs. 16,000 crore to be operational by 2014. It plans to set up another 2
million tpa integrated
steel plant in Karnataka @ capex of US $ 3.9
billion. »
Also setting up 2 pelletisation
plants at Donimalai (1.2 mtpa)
and at Bacheli (2 mtpa). »
Merger of Sponge Iron India is in advanced stage of completion. Upon
merger, company is contemplating to capacity expansion to 260,000 tpa (60,000 tpa).
Sponge iron produced will be used to make steel. ñ
Energy division will focus coal mining and conventional & non-
conventional power projects. »
NMDC is developing 2 coal blocks in Madhya
Pradesh. Besides, company is one of the partners in formation of
International Coal Ventures for acquiring coal properties in »
Company plans to foray into coal based power plants and solar power
generation. ñ
In fertilizer vertical, »
Company is the part of RCF led consortium, which is looking at
overseas Rock phosphate reserves in countries like »
It also plans to acquire overseas assets in rock phosphate / potash
thru NMDC Global. Ø
Besides iron ore, NMDC also plans to go for other minerals like
Diamond, gold etc for which NMDC is looking forward for leases / buy
properties from foreign countries directly / under Special Purpose Vehicle /
Joint Ventures. It has secured prospecting licence
for gold in Ø
NMDC is a debt-free company with strong balance sheet including
surplus cash of ~ Rs 12,077 crore (i.e. as on December 31, 2009. Company
earns OPM% of 78-80 because of lowest
production cost couple with large share of revenues coming from
long-term contracts, high quality of output and firm iron ore prices (both
globally & in domestic market). |
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Ø
NMDC has grown production and sales growth @ CAGR of 20-25% between
FY2005 and FY2009. OPM% improved from 53.2% to 77.2%
between FY 2005- FY 2009, as costs remained steady while realisation
shot up significantly. However, company’s performance suffered setback in 9
months FY 2010 as its operations were disrupted by Naxalite attacks. Sales revenues declined by 24.4% to Rs.
4,255.76 crore (Rs. 5,627.97 crore). OPM% dipped to 71.5% (79.6%). Consequently, PAT declined
by 28.2% to Rs. 2,404.59 crore (Rs. 3,351.19 crore).
Nevertheless, normalised production, improvement in
sales off-take and revision in selling prices will boost NMDC's
earnings in coming quarters. |
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Investment
Concerns Ø
Disruption of operation due to Naxalite
attacks. Company is in constant contact with government agencies for support
and protection of its people and installations Ø
Intense competition from MNCs and private
sector in securing fresh mining leases, resulting in denial of leases in many
cases and litigation delaying actions Ø
Cyclicality in business. Any slowdown in user
industries would have impact on demand for its product. Ø
Govt has substantial influence on the policies
of PSU. Government policy plays a key role in steel sector, with steel
companies lobbying to protect their interests. Export duty of 5% is levied on iron ore lumps. NMDC also requires government
permission for export of iron ore with > 64% iron
content. Moreover, there are quantitative restrictions on exports as well to
ensure iron ore availability for domestic steel consumption. |
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Recommendation Ø
NMDC is offering share @ 27-32 times FY 2010 expected EPS of Rs 11/-
and 17-19 times FY 2011 expected EPS of Rs 18/-. Though FY 2010 valuation
looks on higher side, considering increased earning in FY 2011 backed by
higher volumes & shot up in price realization and across the board
excellent strength (financial & operations) of the company, FY 2011 valuation appear reasonable. Ø
High revenue visibility, superior margins, large cash coffers and
zero debt make NMDC a preferred mining stock. Considering its massive capex plans, company is expected
to grow @ 20-25% for next couple of years. Hence, we recommend to “SUBSCRIBE”. |
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10, 2010 |