NMDC: Too expensive to be a value buy

NMDC is the largest iron ore produce of India. In FY16, NMDC produced ~28.32 million tonnes of iron ore out of the 155 million tonnes produced in India from its mines in Chhattisgarh and Karnataka. NMDC is currently working towards commissioning a steel plant at Nagarnar, Chhattisgarh  by Dec-17 that will produce around 3 million tonnes of flat products. NMDC will maintain its position as the largest producer of iron ore in the country in FY17.NMDC is expected to produce ~31 million tonnes in FY17 out of the total domestic production of ~170 million tonnes. We expect NMDC to just about maintain its sub 20% production share. This is a slight reduction from the around 20% production share in FY14.

NMDC is operating in an environment where global iron ore prices are expected to remain subdued/flat in FY17 when compared to FY16. The outlook for NMDC in FY17 is dependent

  1. Its ability to ramp up or at least achieve its volume target of around ~31 million tonnes.
  2. Global pricing for iron ore.
  3. Differential in domestic vs global prices driving its customers towards imports.
  4. The capex for its steel plant and its impact on the cash reserves. We expect the overall capex spend to be much higher than the panned capex spend.

So do we buy the stock?

We do not see any reason to buy a stock where the earning per share (EPS) has crashed from Rs 16.01 in FY15 to Rs 7.49 in FY16 because of realizations per tonne of iron ore sold.  However, we are interested in the stock given it looks attractive on the following counts

  • It is available at a Price to book of around 1
  • It has delivered a consistent and attractive dividend payout in the past.
  • It carries high level of cash on its balance sheet without any debt.

It would be good to see some improvements in pricing before looking at the stock. However, it would be an interesting scenario if volatility in the stock market makes the stock available at an attractive price.

Where is the margin of safety?

NMDC carries Rs 14,809 crore of cash on its balance sheet, or Rs 37.35 per share of cash that provides the margin of safety if the stock is available around its 52 week low. These cash reserves will finance the capex for the 3 million tonne steel plant. We should look out for the steel plant going over budget.

NMDC has a stellar record in paying out dividends. In FY16, NMDC a dividend on Rs 11 when the earning per share (EPS) was Rs 7.49.  We do not think NMDC has any option but to cut its dividend in FY17. We would not be surprised to see a dividend of in the range of Rs 4-5 in FY17, translating into a dividend yield of 4-5% at a share price of less than Rs 100. Payout for the FY17 dividend will be from the cash on the balance sheet, similar to FY16. A sharper cut in dividend cannot be envisaged as the Government of India holds 80% of the company and would want a healthy dividend.

In the short term, there was talk of offer for sale (OFS) which may create further weakness in the stock. We also hear a buyback story that may provide strength to the stock. Given a book value of around Rs 80 per share, any entry has to be below the book value that is quite a distance away from current prices. It would be even better to look at the stock at levels around its 52 week low or if it makes fresh 52 week lows.

It would be profitable over the long term to buy India’s largest iron ore producer at the right price.



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