NMDC shares tank 8%, erase most gains made last week; should you buy, sell or hold?

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August 31, 2020 12:29 PM

After gaining 12% during the previous week, the share price of NMDC tanked 8% on Monday to trade at Rs 99 per share.

The mines ministry has sought comments from the stakeholders on these proposals till September 3.The mines ministry has sought comments from the stakeholders on these proposals till September 3.

After gaining 12% during the previous week, the share price of NMDC tanked 8% on Monday to trade at Rs 99 per share. The jump in NMDC’s share price was on account of the mining major securing a board approval for the demerger of the NMDC Iron & Steel Plant, which analysts say will unlock value for investors. However, on diving deeper into the fundamentals surrounding the National Mineral Development Cooperation (NMDC), brokerage and research firms have been sounding the cautionary alarm bell. With the imposition of an interim premium of 22.5% on renewal of all mines, analysts say, could result in risk aversion from investors.

The Ministry of Coal, Mines recently announced that a committee under the chairmanship of mines secretary has been formed to look into how much premium, a state or central PSU should pay on renewal of the mines. ICICI Securities highlighted that the Ministry has, in the absence of the committees decision, allowed the state of Karnataka to collect a 22.5% premium. “This may create more uncertainty and risk aversion from investors to get interested in any form of mining entities in the near term,” ICICI Securities said. The brokerage and research firm, with a ‘Reduce’ rating on NMDC said that the committee’s decision could be equal to or greater than 22.5% that has been allowed mutually for Karnataka. “The implications of this measure more than negates whatever value upside could have come from steel plant demerger, as it impacts our FY22E EBITDA by ~Rs21bn or ~35%,” it added.

Although NMDC has received the approval to demerge the steel plant, Kotak Securities believes that the announcement of the demerger alone will not address the challenges. In a note, Kotak Securities said that the steel plant is unlikely to gain investor interest till 2023. “The markets have cheered the demerger decision; however, we believe any value unlocking in the near-term is far-fetched. NMDC would also lose the tax shield from the high capital cost of the steel plant post the demerger,” it added. Analysts at Kotak Securities too have flagged concerns around the additional royalty imposed in Karnataka. NMDC has six mines in Karnataka and Chattisgarh that are up for renewal.

However, Motilal Oswal, just looking at the steel plant demerger has reiterated its Buy rating on the stock. “The proposed demerger of NMDC’s steel plant should unlock value. Investment in steel plant stands at Rs 170 billion (Rs 55/share) and we value it at 50% discount,” it said. The brokerage firm has pegged a target price of Rs 123 on the stock.

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