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Iron-ore miner NMDC is a good investment bet given the company's high grade reserves and growing domestic steel capacity additions which will help volume growth. A 33 per cent correction over the last six months due to economic and regulatory worries has left the NMDC stock trading at a price-earnings ratio of 9.2 times earnings.
This is at the lower end of its historic valuation band. With its enterprise value at five times its operating profit, NMDC trades on par with global peers such as Rio Tinto, Vale and BHP Billiton. But NMDC has a significant advantage as a burgeoning home market provides scope for volume growth. Global peers are far more dependent on the volatile Chinese steel producers. .
FINANCIAL PERFORMANCE
During the first six months of FY12, NMDC registered 17.4 per cent increase in net sales and a similar growth in net profits, excluding ‘other income'. The higher sales and profits were a result of 26 per cent increase in iron ore sales volume. The company saw substantial ‘other income' from its cash holdings of Rs 20,720 crore as of end-September 2011.
The miner's realisations and volumes also received a fillip through e-auctions in Karnataka. After the iron ore mining ban, NMDC remains the sole miner allowed to operate in Karnataka.
Though global iron ore prices have corrected significantly, NMDC's realisations are protected to some extent.
Domestic iron ore realisations are at a discount to international iron ore spot prices of a similar grade. This coupled with the recent rupee weakening have provided NMDC with good case against lowering prices to the same extent as international prices.
The company's cash holdings are likely to serve it well in its mining and steel production forays. Pragmatic expansion plans will see its iron ore mining capacity increased by 50 per cent over the next two years. The company has snapped up a 50 per cent stake in Australian iron ore miner Legacy Iron ore.
While Legacy's reserves are still being estimated, early reports indicate that the acquisition has been made at an attractive price and has the potential to add significantly to NMDC's current reserves.
The company's plan to invest Rs 40,000 crore in two steel plants could result in better profits per tonne of iron ore sold. However this comes with the risk of a higher interest bill from debt incurred in setting up capacity.
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