NMDC

NMDC is entering the capital market on 10^th March, 2010 with a "Further Public Offer" of 33.22 crore equity shares of Re. 1 each, for which the price band by EGoM will be announced on 8^th March,10. Though the shares of the company are listed on BSE and NSE, they are listed without the company having ever come out with an IPO. So infact, the present one is an IPO and not FPO, as called now.

On 28^th December, 93, Govt. of India, divested 21.30 lakh shares to insurance companies with a small portion to public as well. Post this, the company issued 2 bonus shares for every 1 share held, as also, split the face value to Re. 1, which has resulted the float to rise to 6.40 crore shares. Of this, 5.49 crore shares are now held by 21 institutional investors, while, 92 lakh shares, being 0.23 per cent, is held by the public. Due to this, the share is not seeing efficient price discovery.

Share is presently ruling at Rs. 420 with its 52 week high being Rs. 572 touched on 19^th Jan. 2010. Since then, share price has been sliding and may correct below Rs. 400 by 8^th March. But, if one decides to take a fundamental call on the stock, price should not be more than Rs. 300, on which 5% discount needs to be given to the retail investors. So, price band has to be in the range of 275 to 300.

For FY09, the total income of the company was at Rs. 8,575 crores with PAT at Rs. 4,372 crores, resulting in an EPS of Rs. 11. Book value per share, as at 31-03-09, stood at Rs. 29.30. However, first 9 months of FY10, has been showing a declining trend of operations, with total income at Rs. 4,882 crores with PAT at Rs. 2,382 crores, resulting in an EPS of Rs. 6. So, even if we estimate an EPS at Rs. 10 for FY10, with book value at Rs. 39, share at 300 will be issued at a PE of  about 30 times and PBV of 7.50 times.

As against this, Sesa Goa, a comparable player has posted sales of Rs. 3,440 crores in 9 months ending Dec. 09, with PAT at Rs. 1,416 crores, resulting in an EPS of Rs. 17.25 for the period, on face value of Re. 1. Book value as at 31-12-09, stood at Rs. 80 per share. So, Sesa Goa is now ruling at a PE of about 16 times, considering an EPS of Rs. 27 for FY10 and ruling at a PBV of 5.50 times. This company also has an advantage of being debt free like NMDC. For FY 10, PAT margin for NMDC is at 49% while it is at 41% for Sesa Goa. In terms of operating size, Sesa Goa is half of NMDC. Still, Sesa Goa has market capitalisation of just Rs. 37,000 crores while NMDC has it at Rs. 1,67,000 crores.

This is mainly due to low float of NMDC, which presently is at 0.23% with the public. Institutional investors holding about 1.40% are not selling the stock, despite knowing fully well, that it is overpriced. If they start offloading even a part of their holding, share price can correct substantially. So, the institutions are playing on the psyche of "hold" because that allows them to have a halo of unrealistic valuations around them, which is ultimately raising the NAV of such insurance companies. Hold to hold the gains - that is what it is all about!

Even if we consider the fact that NMDC enters into long term contract for a term of five years with 96% of its domestic contracts, due to expire in 2010 and 100% of export contracts, due to expire in 2011, it will still remain in a disadvantageous position, as next renewal will happen at the beginning of an upturn in the commodity cycle. Also, 74% of its turnover comes from 2 players, viz. Rashtriya Ispat (37%) and Essar Steel (37%) which is also seen as negative, as in the event, these customers go for their own captive iron ore mines.

Realising all these, Govt. has decided not to go via French Auction route, as QIBs would not have been too enthused to bid aggressively. Infact, French Auction does not work well, in case of low float stocks like NMDC, Hindustan Copper and MMTC. And which is why, the bait of a 5% discount to retail investors is offered. Govt. will try its level best to attract retail investors in this issue, which were conspicuous by their absence in NTPC and REC FPO.

NMDC will be a big test for the Govt. in fixing the price band, which in our view should be between 275 to 300.