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06 September 2011
The Bollywood star Salman Khan has risen from ashes like a phoenix. In the latest world cup cricket, Yuvraj Singh made a strong comeback proving his critics wrong. In golf, Tiger Woods is once again trying to prove his world class status as Number One. Sometimes, it pays to bet on fallen stars. This is true in the world of equity markets also. Bharti Airtel and Idea Cellular were down in the dumps for quite some time and now they have staged a strong comeback. NMDC Limited is one such stock that is trying to reverse its fortunes on the bourses now. In the last few years, it has lost more than 60 per cent of its market value and now it is poised to make a comeback. NMDC Limited is a large-cap stock with a market capitalization of around Rs 93,000 crore. Even though its a large-cap stock, it doesnt form part of the benchmark indices. It is Indias biggest iron producer. Government of India holds 90 per cent of companys paid-up capital, which is Rs 396.5 crore. The stocks attractions are low-valuation, huge cash pile, high quality iron ore, high demand for iron ore and future growth opportunities. The investment theme is as follows: Business Model
It is the biggest iron producer in India. It supplies iron ore to the steel industry. The dominant customers of the company are Rashtriya Ispat Nigam Ltd and Essar Steel. It sells more than 90 per cent of its production in India. Most of the production is earmarked for long-term customers. NMDC has changed its pricing policy from yearly to quarterly pricing. It has vast reserves of iron ore that are low-cost and high-quality. Moreover, it is a low-cost producer of iron ore. It has mining complexes in Chhattisgarh and Karnataka states. It produced 25.16 million tonnes of iron ore in 2010-11.
Growth Drivers
Several steel plants are coming up in India in the next few years which will keep the demand for iron ore very high The company is increasing the iron ore production It is planning forward integration with plans to set up two steel plants in Karnataka and Chhattisgarh It wants to acquire mining assets abroad
Risk Factors
The controversy surrounding illegal mining in Bellary District of Karnataka may further impact NMDCs valuation till full clarity comes out According to the Draft Mining Bill, NMDC may have to pay royalty to compensate the local public who are displaced by new projects The growth of iron ore industry is linked to the fortunes of steel industry in general Sometimes, huge cash on books may be a drag on return on net worth The equity markets around the globe are highly volatile now due to sovereign debt crisis in the West. The volatility of global markets is impacting Indian stocks also, which in turn may affect the valuation of NMDC in the short run.
Valuation
The stock price of NMDC Limited looks reasonable and attractive at the current market price (closing on 05 September 2011) of Rs 235 per share. Price-earnings multiple is 13.7 and price-book value is 4.4. The face value of the equity share is Re 1. Its one-year high is Rs 305 and one-year low is Rs 205. For 2010-11, it paid a dividend of Rs 3.30 per share working out to a dividend yield of 1.4 per cent. Investors with a time horizon of three to five years may acquire equity shares of NMDC Limited in a staggered manner at different price levels and time periods provided they have the risk appetite and surplus cash for equity investments, keeping in mind the risk factors mentioned above. Sources: BSE and NMDC
Disclaimer: The authors views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. There is a risk of loss in equity investments. Investors need to consult their certified financial adviser before making any investment decisions. For authors articles on financial markets, just click: www.scribd.com/vrk100 www.ramakrishnavadlamudi.blogspot.com