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Investors with a long-term perspective can consider bidding on Wednesday between 9.15 a.m. and 3.30 p.m. in the offer-for-sale by the Government in iron ore miner NMDC. At the floor price of Rs 147 (lower by 7.5 per cent than Tuesday’s closing price of Rs 159), the stock discounts its trailing twelve month earnings by 8.2 times. This is lower than levels the stock has traded at in the past (more than 12 times).
Solid franchise
NMDC has high quality iron ore reserves and is the dominant iron ore miner in the country, accounting for more than 40 per cent of the output. Its position has been strengthened in recent times by mining stoppages in States such as Karnataka and Goa.
NMDC which has mines in Karnataka and Chhattisgarh is not subject to these restrictions. Also, the company has benefited from a change in pricing mechanism. The shift from a system-based on export parity prices to one based on domestic demand-supply dynamics helped NMDC raise prices for its output at regular intervals even as global iron ore prices weakened. This, combined with the company’s low cost of operations and zero-debt status, enabled it to bolster its already strong margins. Net margin is around 65 per cent.
Between FY08 and FY12, NMDC’s sales grew at average annual rate of 18.5 per cent to Rs 11,261 crore while its profit grew by around 22 per cent annually to Rs 7,300 crore. However, due to heavy rains in Chhattisgarh impacted production and sales, and the company’s profit dipped almost 15 per cent in the recent September quarter.
In the near-term, NMDC’s performance could remain muted. Uncertainties in the global economy have dragged down international iron ore prices. There could also be stagnation in the country’s steel sector. These factors could impact NMDC’s output and realisations. But in the long-run, the company should benefit from ambitious expansion plans of many steel companies which should translate into higher demand for iron-ore.
NMDC plans to expand its production from around 27 mtpa to around 50 mtpa over the next 4-5 years. It also plans to set up 3 mtpa steel plants in Chhattisgarh and Karnataka, and expand it overseas presence.
Price priority method
Shares in the offer-for-sale will be allocated on a price priority method. This means that bids received at higher prices would be given preference.
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