NMDC Steel ( NSL ) - A Unique Demerger Opportunity

Stock Opportunities Special Situations
44

Valuation:

  1. Replacement value = 8000 Cr per MTPA i.e. 24,000 Cr for 3MTPA
    Enterprise Value = Mkt Cap + Debt – Cash =14,041+6662-721 = 19982
    For EV=Replacement value . price per share is 61.6 INR

  2. EV/EBITDA = 6 (industry standard)
    19982/EBITDA = 6
    EBITDA required = 3330 cr (for current valuation i.e. 48.9/share)

JSW & Tata – EBITDA per MTPA is 800-1000 cr

From EV/EBITDA perspective the company looks fairly valued & from Replacement value perspective the company is underpriced.

Pls correct/modify , in case i miss anything.

Disc : Holding at 48 levels

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45

Is replacement cost valuation model even viable? The only notable figure I remember that used it was Harshad Mehta.

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46

This company is in the process of demerger & the acquiring company will be interested in repalcement value. As it is easy for them to compare this investment with the expansion, they make inorder to obtain new equivalent capacities.

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47
  1. NINL was acquired by TATA STEEL @ 2x Book Value by divestment from GOI ?
  2. What is the potential for Brownfield Capacity expansion at Nagarnar plant?
  3. After divestment will it continue to be listed and traded separately?
    @Rakesh_Arora sir any clarity on this will be helpful. thank you.
48

Replacement cost analysis is good only if the company is getting sold. At the moment there are no signs of it. For going concern, one can use 2 methods

  1. 6x EV/EBITDA - here one needs to take normalised EBITDA per ton which company can make on average across the cycle. We are yet to see what this company delivers on steady state.
  2. In absence of earnings, best to rely on P/B for undervaluation or overvaluation. Such stocks bottom out around 0.5x P/B and rarely will go above 1x unless the profitability improves and ROE goes beyond 14-15%.
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