The NMDC stock came off sharply by 6% on Tuesday to Rs 375.60 and with this, the stock has given up just over 32% or about one-third of its value between mid-January, when the price was Rs 556, and now. In the same time the market has come off by less than 1%. One reason the stock has lost so much value is because the follow-on offer was anticipated but the fall also has much to do with the fact that the stock is very illiquid with a float of just 1.62% of the equity capital or 6.3 crore shares. The stock has commanded a scarcity premium because of the small float but that premium will reduce since the float will increase to 10% after the issue, with the number of shares available for trading in the market being around 40 crore.
The follow-on issue has been priced at between Rs 300-350 and the annualised earnings per share (EPS) 2009-10 is Rs 8. That means the stock is valued at between 37.5 and 43.8 times which is outrageously expensive relative to the market because at 17,047, the Sensex trades at around 20 times, current year?s earnings. But of course, NMDC will turn in a much improved performance in 2010-11 thanks to higher demand for iron ore which will fetch it better price realisations. Prices of iron ore in the spot market are double what they were a year back and more important, contracts coming up for renewal are expected to go through at prices that are higher by 45-50%.
Also, NMDC has 1.2 billion tonne of reserves and resources and its iron ore is of a very high grade while production costs at $9 per tonne, brokerage CLSA, points out are among the lowest in the world. Moreover, the company plans to take up its capacity to 50 million tonne per annum by 2014-15 from 30 million tonne per annum currently and also plans to start making steel.
CLSA estimates that NMDC?s EPS will grow at a compounded 52% between 2009-10 and 2011-12. But that growth comes on a lower base because the EPS will contract this year by 22%. Nevertheless, an EPS, in 2010-11, of close to Rs 17 means the stock will command a valuation of between 17.6 and 20.6 times at Rs 300 and Rs 350 respectively. At 17,047, the Indian stock market trades at a P/E of 16. 2 times estimated 2010-11 earnings while at Rs 440, Sesa Goa, also a mining company though not strictly comparable with NMDC, trades at 10.5 times. Clearly even at Rs 300, the stock is at a huge premium to Sesa Goa. Also, mining is a cyclical business? not so long ago the global slowdown sent demand for iron ore crashing. In the nine months to December 2009, NMDC?s sales came off by 24% to Rs 4,256 crore while the net profit saw a sharper drop of 28% to Rs 240 crore. Indeed, the net margin came down to below 49% from 50.7% in 2008-09 and 51.2% in the previous year. Also, the government?s decision to change its royalty calculation from a specific duty to a 10% levy on sales has hurt the company.