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NMDC IPO: Not A Bargain

I’ve been asked about the NMDC IPO  – a follow on public offer that involves a sale by the Government of India, of 33 crore shares. The price band is between 300 and 350 for the mining company. Retail investors get a 5% discount on the discovered price.

Note that the current market price is 377. But that has come down from 425 in two days so expect more fireworks; plus in a very illiquid stock, the price doesn’t give you much information.

Okay so how do we value this business?

  • You have to compare NMDC to the (much) smaller companies of Sesa Goa, or the (much) larger players of Rio Tinto, BHP and Vale.
  • The FY10 P/E of the above players is 13 to 28. Averages are around the 20 range.
  • NMDC has an EPS of about Rs. 11 last year (FY09) and in the nine months of FY10 they’ve got an EPS of 6.03. Assuming an EPS of 10 for FY10, the P/E is 30-35, in the price band. Comparatively, very high.
  • In the first nine months of the year, the profits are about 2,400 cr. That doesn’t compare well with the last full year (FY09) profit of 4,350 cr. Expect a negative growth in EPS unless they have a mindblowing quarter.
  • There’s a shortage of shares because of the huge govt. holding – that will indicate a premium of some sort. Also this is the largest mining co. in India. Added up, though, I wouldn’t pay a premium of more than 25% for these advantages.
  • NMDC has cash of nearly 10,000 cr. on the books. That’s less than Rs. 30 per share; not very significant. But if they can deploy it well they could juice up EPS substantially – unfortunately nearly everything they can buy is expensive because it’s the up-cycle in commodities.
  • Commodities are highly cyclical, and the company makes most of it’s money in iron ore. They plan to increase output to 50m tonnes after a drop to 24 tons this year from last year’s 29. That’s just doubling output over five years, a CAGR of 15%. Can one expect demand to grow at that rate – for products like steel? The price of ore will depend on prices abroad as well since steel producers will import ore if it is at a big difference to local prices.
  • EBIDTA: Consider 7,000 cr. (FY09 was 6700 and this year will be lower) At the lower band price of 300, the company is valued at 120,000 cr. That’s EV/EBIDTA of 17. In comparison, other players are around 12.
  • EV per ton of reserve: They have 1.2 bn of reserves, with about 65% iron. Worldwide EV to metal reserves is about $19-20 per ton. At that rate and a Rupee to $ price of 46, the valuation’s just 170.
  • Valuation wise – if you look at comparative P/E, EV/EBIDTA, or valuation based per ton of reserves the lower band price of Rs. 300 looks ultra expensive. You’d probably pay 200 for this given the premiums, if you wanted to pay “fair price”. (But who wants to pay fair price, we all want a bargain)
  • I’m personally not interested in this IPO. I’ve decided that if I want to buy stocks they should be so ridiculously cheap that it feels like a fantastic deal. “Shooting ducks in a barrel”. NMDC is like shooting a fish from 3 miles away in the ocean, with a bow and arrow. You might hit it, but how lucky is that.

Comparative charts: BHP and Rio Tinto

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and Vale and Sesa Goa:

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