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

2 Likes
45

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

1 Like
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%.
8 Likes
49

Latest ratings, expecting profit of 100-200 cr for the FY26.

Turnaround, may be, but the waiting will be long for asset divestment.
Knowing steel cycle can help for better entry.
disc: No holdings

3 Likes
50

It appears certain that NMDC Steel will not be privatized. Source: This interview at timestamp 2:45.

No disinvestment in NSL
NBC-TV18 | ‘DGTR has invited responses on industry demand for safeguard duty on steel imports’, says Sandeep Poundrik, Secretary, Ministry of Steel. He tells Parikshit Luthra that they need $120 billion investments in order to become self reliant in steel sector. Adds, there is no fresh development w.r.t NMDC Steel disinvestment from the Steel Ministry.

So NMDC and NMDC Steel will remain government entities.

Further to that, I see that the both NMDC and NMDC Steel Limited share a Chairman and Managing Director:
Mr. Amitava Mukherjee serves as Chairman & Managing Director of both NMDC Limited and NMDC Steel Limited.

NMDC Steel also has other overlapping directors with NMDC:
Shri Vishwanath Suresh - Director (Commercial)
Shri Vinay Kumar - Director (Technical)

Is this not a clear conflict of interest because NMDC Steel is a direct consumer of the ore produced by NMDC ?

In other words, NMDC Steel is dependent on NMDC for its key raw material.

While I understand that power and fuel are major cost components for a steel manufacturer, raw material pricing undeniably plays a critical role.

Add to that a steel manufacturer in India always faces the below challenges:

  1. India lacks scrap resources unlike other countries.
  2. Natural gas prices are significantly higher in India.
  3. Coking coal (high quality low ash coke) has to be imported.

So, the only major cost component NMDC Steel can locally and reliably source is iron ore from NMDC.

But this brings up an important concern:
When iron ore prices fall, whom will the shared Chairman and Managing Director favor?
Will he allow a drop in NMDC’s profitability so that NMDC Steel can benefit, or will he prioritize NMDC’s margins and let NMDC Steel take a hit?

I am apprehensive about the fact that since NMDC Steel might one day become a private entity, the Government might treat it like a step child now and favor NMDC over NMDC Steel.

2 Likes
51
Method Scenario Key Assumptions Fair EV (₹ Cr) Market Cap (₹ Cr) Fair Value / Share (₹) Probability Weighted Value
:one: EV/EBITDA Bull EBITDA ₹3,000 Cr, 6× multiple 18,000 12,700 ₹60–65 25% ₹15.0
Base EBITDA ₹2,000 Cr, 6× multiple 12,000 6,700 ₹32–34 50% ₹16.5
Bear EBITDA ₹1,200 Cr, 6× multiple 7,200 1,900 ₹20–22 25% ₹5.2
→ Weighted (EV/EBITDA) ₹36.7/share
:two: Replacement Cost Bull Strategic sale @ ₹8,000 Cr/MTPA = ₹24,000 Cr EV 24,000 18,700 ₹60–65 25% ₹15.0
Base 0.9× replacement cost (no privatization) 21,000 15,700 ₹52–55 50% ₹26.8
Bear 0.7× replacement cost (PSU discount) 17,000 11,700 ₹38–40 25% ₹9.8
→ Weighted (Replacement Cost) ₹51.6/share
:three: Book Value Bull P/B 1.2× (re-rating on profitability) — — ₹60 25% ₹15.0
Base P/B 1.0× (trading at intrinsic book) — — ₹50 50% ₹25.0
Bear P/B 0.6× (market loses confidence) — — ₹30 25% ₹7.5
→ Weighted (Book Value) ₹45.0/share
2 Likes