NMDC

NMDC is entering the capital market on 10^th March, 2010 with a "Further Public Offer" (FPO) of 33.22 crore equity shares of Re. 1 each, for which the price band of Rs.300 to Rs.350 per share has been announced. The retail investors will be getting a discount of 5% on discovered price. The share closed at Rs. 400 on 8^th March 2010, post which , this price band has been announced.

 Though the shares of the company are listed on BSE and NSE, they have been listed without the company having come out with an IPO. So infact, the present one is an IPO and not FPO, as called it is being referred to 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.

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 is now issued at a PE of  about 10 times and PBV of 7.70 times, calculated at the lower price band  of Rs.300.  The 5% discount offered in this issue, to retail investors, will make it look little better.

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. 36,000 crores while NMDC has it at Rs. 1,59,000 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% is not selling the stock, inspite of knowing fully well, that it is overpriced.If they start offloading even a part of their holding, share price can correct substantially. So, better to enjoy unrealistic valuations, which ultimately is raising NAV of such insurance companies.

Even if we consider the fact that NMDC enters into long term contracts 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 postion, 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. Also, price band has been kept lower by about 25 % of its current market price, on its lower end of price band coupled with a discount of 5%, offered to the retail investors. So, Govt. is trying its level best to attract, retail investors in this issue, which were conspicuous by their absence in NTPC and REC FPO.

But we feel that it will be in the interest of the retail investors to see book getting discovered at Rs. 300 per share, thus giving a net cost of Rs. 285 per share to retail investors. We had advised the price band to be in the range of 275-300 per share.

We feel that post this issue, share price will correct to its realistic levels, due to increase in float to over 11%, which in our view would be around Rs. 300 per share. So, it is advised to apply in the issue at the lower band of Rs. 300 per share and advice is to refrain from applying at the cut off. In all probability, book is likely to get discovered at Rs. 300 per share. Hence, it would have been prudent on part of the Govt. to announce the band with narrow range of Rs. 25. This wide range of Rs. 50 in price band, indicates lack of confidence, even on part of the Govt. Even QIB category is likely to see offer coming in at around Rs. 300 per share.

So it is a clear advice to retail investors to apply at Rs. 300 per share. If price gets discovered at Rs. 300 per share, net cost of acquisition to them will be Rs. 285 per share, which will leave some profit on the table for the prospective retail investors. If by chance, price gets discovered at Rs. 350, due to  good response of QIB, it may not sustain on listing of new shares due to increase in float.