NMDC Steel listed today with an opening price of ₹30.25 at the BSE and immediately hit the 5 per cent upper circuit. The company was demerged from NMDC and every shareholder (as on record date) of the iron ore company got a share of the demerged steel company. The new shareholders of NMDC Steel can hold the stock, which is trading at fair valuations. Government of India, which is the promoter of NMDC Steel, plans to operate and invite investors for the steel plant.

At the time of record date, based on the relative valuation of another PSU steel manufacturer SAIL, we estimated a price range of ₹13 to ₹51 per share for NMDC Steel. This was arrived at by assigning a price-to-book value range of 0.2 times to 0.75 times. The stock opened at the mid-point of the range, implying a price-to-book of 0.45x at the opening price for NMDC Steel. SAIL is currently trading at 0.65 times LTM book value and given the differences in operation of NMDC Steel and SAIL, this a fair valuation for the company.

The NMDC Steel plant located in Nagarnar, Chhattisgarh, with a planned capacity of 3 million tonnes (MT), is yet to be commissioned after seven years and is hopeful of producing Hot Rolled Coil steel by March 2023. This compares to 20MT installed capacity of SAIL, a running steel plant. The current upcycle of steel is reflected in SAIL’s comparative valuation as well, which tested the lower range of 0.2 times in FY20 before recovering to the current valuation range. While other privately owned producers trade at a higher range on a price-to-book value basis (2.1 times for JSW Steel, 1.7 times for Jindal Steel and 1.2 times for Tata Steel), NMDC Steel, which is a PSU company, may be compared to SAIL for valuations.

NMDC, on the other hand, is now free of development-related overhang from NMDC Steel, which along with an attractive dividend yield (around 12 per cent in FY22), underlined our positive view on the stock earlier. The stock, which was trading at ₹130 per share prior to announcement of the demerger record date, declined 20 per cent on ex-record date (27th October) and has recovered to ₹118 now.