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NMDC FPO review and analysis by Keynote Capitals

Contributed by Keynote Capitals

By Keynote Capitals

Highlights

Price Band : Rs300 - 350 per share                       

FPO open during : March 10 - 12, 2010

Book Running Lead Managers : UBS, Citi, Edelweiss, Kotak, Morgan Stanley, RBS

Listed on : NSE (Price Rs380) & BSE (Price Rs380)

Market Cap post-FPO : Rs1388bn ($30bn) (based on the cap price)

Executive Summary

- NMDC Ltd., a “Nava-ratna” public sector undertaking (PSU), was incorporated in 1958 as National Mineral Development Corporation Private Ltd. with the objective of exploring and exploiting minerals and manufacturing and selling products obtained therefrom.

- First disinvestment in 1993 to institutional and retail investors @ Rs83.52 per share of face value Rs10 (or Rs8.35 for face value of Re1 per share).

- It is a pioneer in the Indian mining industry with reserves and resources of 1.36bn tonnes of iron ore and is the largest producer in India during the last three financial years. NMDC also operates one of the largest diamond mines in Asia with the authorisation to produce 100,000 carats of gem and industrial diamonds per annum.

- Strong in-house capability to undertake exploration: NMDC is actively involved in exploration and development activities so as to apply for and acquire new iron ore and other mineral leases thereby expanding its reserves and diversifying its production.

- Its R&D center, established 1970, has competence in undertaking technology development projects in the field of ore beneficiation and mineral processing e.g. to convert waste material into products of commercial value.

- We believe the primary reason behind the high valuation of NMDC’s secondary market listed stock is extremely low supply, with the free float being just ~1.6%. However, with announcement of the price band of Rs300-350 per share for the FPO, we expect further price discovery to happen on listing of the FPO shares.

- We have arrived at a fair value of Rs270 per share, based on our workings (refer page 2). The fair value thus arrived at is lower than even the floor price of the FPO, and much below the current secondary market price. Though the FPO pricing seems to be in line with our estimate of EV per tonne of Reserves, we believe the latter is a rather lenient valuation benchmark for the industry. We note that the FPO (at the floor price) is priced at a p/e of 32.1x and 21.4x FY11E and FY12E earnings respectively vis-?-vis Sesa Goa which trades at p/e of 11.2x and 9.8x and GMDC 12.2x and 9.8x FY11E and FY12E earnings respectively.