NMDC-Poised For a Comeback-VRK100-06Sep2011

NMDC Limited – Poised for Comeback

Rama Krishna Vadlamudi, Hyderabad

06 September 2011

The Bollywood star Salman Khan has risen from ashes like a phoenix. In the latest world cup cricket, Yuvraj Singh made a strong comeback proving his critics wrong. In golf, Tiger Woods is once again trying to prove his world class status as Number One. Sometimes, it pays to bet on fallen stars.

This is true in the world of equity markets also. Bharti Airtel and Idea Cellular were down in the dumps for quite some time and now they have staged a strong comeback. NMDC Limited is one such stock that is trying to reverse its fortunes on the bourses now. In the last few years, it has lost more than 60 per cent of its market value and now it is poised to make comeback.

NMDC Limited is a large-cap stock with a market capitalization of around Rs 93,000 crore. Even though it’s a large-cap stock, it doesn’t form part of the benchmark indices. It is India’s biggest iron producer. Government of India holds 90 per cent of company’s paid-up capital, which is Rs 396.5 crore. The stock’s attractions are low-valuation, huge cash pile, high quality iron ore, high demand for iron ore and future growth opportunities. The investment theme is as follows:

Business Model

It is the biggest iron producer in India. It supplies iron ore to the steel industry. The dominant customers of the company are Rashtriya Ispat Nigam Ltd and Essar Steel. It sells more than 90 per cent of its production in India. Most of the production is earmarked for long-term customers. NMDC has changed its pricing policy from yearly to quarterly pricing. It has vast reserves of iron ore that are low-cost and high-quality. Moreover, it is a low-cost producer of iron ore.  It has mining complexes in Chhattisgarh and Karnataka states. It produced 25.16 million tonnes of iron ore in 2010-11.

Growth Drivers

Ø      Several steel plants are coming up in India in the next few years which will keep the demand for iron ore very high

Ø      The company is increasing the iron ore production

Ø      It is planning forward integration with plans to set up two steel plants in Karnataka and Chhattisgarh

Ø      It wants to acquire mining assets abroad

Results for the quarter ended 30 June 2011

Net sales for the company are Rs 2,783 crore, showing a growth of 10.5 per cent over the corresponding quarter of previous year. Its net profit is Rs 1,801 crore, recording a growth of 20 per cent mainly driven by 100 per cent surge in other income. Interest earned on its huge cash reserves is the main component of other income.

Financial Ratios as on 31 March 2011

NMDC Limited has got a strong balance sheet. Its cash holding per share works out to Rs 43.50, with a total cash of Rs 17,228 crore. The company has no debt on its books. The total net worth of the company is Rs 19,215 crore with a book value per share of Rs 48.50. Its operating profit margin is 87 per cent, return on capital employed at 58 per cent and return on net worth Rs 39 per cent. 

Risk Factors

Ø      The controversy surrounding illegal mining in Bellary District of Karnataka may further impact NMDC’s valuation till full clarity comes out

Ø      According to the Draft Mining Bill, NMDC may have to pay royalty to compensate the local public who are displaced by new projects

Ø      The growth of iron ore industry is linked to the fortunes of steel industry in general

Ø      Sometimes, huge cash on books may be a drag on return on net worth

Ø      The equity markets around the globe are highly volatile now due to sovereign debt crisis in the West. The volatility of global markets is impacting Indian stocks also, which in turn may affect the valuation of NMDC in the short run.

Valuation

The stock price of NMDC Limited looks reasonable and attractive at the current market price (closing on 05 September 2011) of Rs 235 per share. Price-earnings multiple is 13.7 and price-book value is 4.4. The face value of the equity share is Re 1. Its one-year high is Rs 305 and one-year low is Rs 205. For 2010-11, it paid a dividend of Rs 3.30 per share working out to a dividend yield of 1.4 per cent. Investors with a time horizon of three to five years may acquire equity shares of NMDC Limited in a staggered manner at different price levels and time periods provided they have the risk appetite and surplus cash for equity investments, keeping in mind the risk factors mentioned above.

Sources: BSE and NMDC

Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. There is a risk of loss in equity investments. Investors need to consult their certified financial adviser before making any investment decisions.

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