National Mineral Development Corporation (NMDC): Brief on OFS
Emkay Equity Advisory
National Mineral Development Corporation (NMDC)
The government is coming out with offer for sale (OFS) of its 10% stake in NMDC ( not rated). Currently the government holds 90% stake in the company. If the transaction goes as planned, the government’s stake would come down to 80%.
The price band for the OFS is fixed at Rs 145 to Rs 150
Upon fully subscription, at the upper band the Govt will mop up Rs 59.46 bn and at the lower band it would be Rs 57.48 bn
On the basis of strong fundamentals and attractive valuation we recommend “subscribe”
Brief description:
Company background:
NMDC, a fully Government of India fully owned public enterprise was incorporated in 1958 and is currently under the administrative control of Ministry of Steel. The company is involved in exploration of iron ore, copper, rock phosphate, magnesite, diamond, tin, graphite, etc. Its India’s largest iron ore mining company with a current capacity of 32 mtpa and reserves of 1159 mt. The company currently produces ~22 mt from its Bailadila mines in Chhattisgarh and ~7 mt from Donimalai mines in Karnataka. NMDC’s average grade of ore at 64% is also superior to many of the peers.
NMDC’s assets and capacities:
|
Assets |
Capacity |
|
Total Iron Ore Capacity |
32 mtpa |
|
Sponge Iron |
60 ktpa |
|
Diamond |
100,000 Carats |
|
Wind Power |
10.5 MW |
Expansion plan:
The company is under process of expanding its iron ore capacity from 32 mtpa currently to 48 mtpa by FY15. The projects include 7 mtpa capacity at Bailadila 11-B, 7 mtpa capacity at Kumaraswamy and 2 mtpa capacity expansion of existing deposit 10/11A. The company plans to spend Rs 300 bn under the 12th plan period. For value addition, NMDC is in the process of developing a 3 mtpa steel plant at Jagdalpur and 2 pellet plants at Donimalai (1.2 mtpa) and at Bacheli (2 mtpa). Besides, NMDC is also in the process of merger of Sponge Iron India Limited with plan for expansion to produce billets. NMDC is also investing a Wind mill project of 10.5MW capacity which has been completed & commissioned at Karnataka.
Expansion plan of NMDC
Financial performance:
Visibly the company has delivered superior performance in the past few years and with the current capex and expansion plan, coupled with a favorable domestic as well as global scenario, NMDC is en route to perform in an even bigger way going forward.
Revenue has seen 14% CAGR |
|
EBITDA has grown at 15% |
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PAT increased at a CAGR of 18% |
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ROE/RoCE however contracted to 31%/30% in FY12 |
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Quarterly snapshot:
|
INR mn |
Q2FY13 |
Q1FY13 |
Q2FY12 |
YoY |
QoQ |
H1 FY13 |
H1 FY12 |
YoY |
|
Net Sales (Rs mn) |
26,120 |
28,404 |
30,625 |
-15% |
-8% |
54,523 |
58,451 |
-7% |
|
EBITDA (Rs mn) |
19,349 |
23,020 |
24,358 |
-21% |
-16% |
42,369 |
46,903 |
-10% |
|
EBITDA Margin (%) |
74% |
81% |
80% |
-546 bps |
-697 bps |
78% |
80% |
-253 bps |
|
APAT (Rs mn) |
16,786 |
19,060 |
19,632 |
-14% |
-12% |
35,846 |
37,643 |
-5% |
|
EPS (Rs) |
4.23 |
4.81 |
4.95 |
-15% |
-12% |
9.04 |
9.49 |
-5% |
Strength:
· Expansion led volume growth to address higher demand from the addition in steel capacity
- A likely beneficiary of the settlement of the iron ore mining issues in terms of possibility of getting more allotment
- Changing mechanism to give pricing power being the largest player and closure of many small and inefficient mines
- Higher grade, lowest costs (at $8.7/ tonne)- will continue to support strong margins
Concerns:
- Company’s plan to set up a steel plant with a capex of Rs 155 bn would prove to be an overhang on the margin front.
- Moreover, the proposed cross-holding in PSUs if goes through, NMDC might be forced to deploy its cash without any synergy benefits
- Introduction of mining tax at the current form and fashion would be a deterrent
Valuation:
As per the consensus estimates, the company at the CMP of Rs 150, trades at 7xFY14 EPS, 5.1xFY14 EV/ EBITDA and 1.6xP/ BV. Dividend yield stands at 2.8%. Our preliminary DCF based valuation translates into a fair value of Rs 191/share.
Peer comparison:
NMDC’s valuation in terms of global peers is also attractive as the company at a price of Rs 150 on the basis of reserves adjusted for metal content is available at a EV/ tonne of ~US$10 compared to more than US$20 for most of the pure iron ore producers in the world.
Comparative performance (Latest annual nos)
|
|
Sales vol (mt) |
Sales ($ mn) |
EBITDA Margin |
|
|
BHP Billiton |
160.0 |
22,601 |
63% |
|
|
Vale |
257.3 |
34,514 |
74% |
|
|
Rio Tinto |
239.0 |
24,097 |
72% |
|
|
NMDC |
27.3 |
2,656 |
81% |
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*for BHP, Vale and Rio EBITDA margin is for iron ore business only
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Thanks & Regards, |
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Emkay Equity Advisory | Emkay Global Financial Services Ltd. | www.emkayglobal.com |
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7th Floor, The Ruby, Senapati Bapat Marg, Dadar (W), Mumbai– 400 028| Board No.: +91-22-66121212 | Fax : +91 22-6612 1299
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