Current mktcap=36701 cr
Cash balance=5904 cr
Debt=1214 cr
NP=3857 cr
One can buy the entire business at CMP and get an immediate 12% yield
NP/(MKT CAP+DEBT-CASH BALANCE)=12.05%
Current dividend yield=4.5% which is very likely to be sustained or even raised.
In addition, there seem to be many growth factors over the next 5 years:
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SC has this year forced closure of 7 mines in Odisha for failure to pay penalties. This has already raised iron ore prices. This will probably be made up by other mines or the mines will get back into operation later in FY19 after payment of penalties so this is a short term advantage
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In the medium term, lots of private mining leases across the country are ending in Mar20, and will be auctioned. This will cause large scale disruption to production and there is a potential hit to production of 60 MTPA which is huge. NMDC mines are not affected. This should cause elevated iron ore prices for a while until new owners stabilise ops.
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The long awaited 1.2 MT pellet plant has started up and this should add to profits as this uses byproducts as feedstock (iron ore tailings) which have till now not been used and are available in abundance.I have seen an estimate of 450 cr annual addition to profits out of this.
4)The long delayed 18K cr 3MTPA Chattisgarh steel plant should start production in Dec18. This should be a profitable, maybe even highly profitable plant, built with the latest tech, high economies of scale, reportedly with one of the biggest blast furnaces in India, captive iron ore mine and easy access to mines & ports (HDFC report)
Potential revenues and profits from this and the pellet plant dont seem to be reflected in the current valuations. My estimate is that even assuming initial operation at a conservative 40% capacity it should add 3000-4000 cr to annual revenues.
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Indian steel players are ramping up capacities which should create its own demand. Essar steel situation should get resolved soon and the new owners first priority will be to ramp up efficiencies and production, as Tata is trying to do on a war footing with Bhushan steel. Essar is a major customer. So is RINL which recently completed a huge expansion in steel capacity from 3 MTPA to 7 MTPA.
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NMDC is also trying to offload 49% in the steel plant to a partner, if this happens, it will add to cash balance. Their expectation is to net 14k cr for it.
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NMDC is actively scouting partners for SPVs to set up additional steel plants in Jharkand and Karnataka
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Various projects are in progress to take the iron ore production capacity from 34 MTPA (utilised a 100% this last FY) to 67 MTPA in 3 years.
Negatives that I see-
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Depreciation for the pellet and steel plant will reduce profits somewhat, of course more than balanced out by the additional revenues.
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Expansion across many players in steel production might depress steel prices and reduce iron ore demand in the longer term
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Some global disruption that may depress iron ore international prices.
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Some steel players now have captive mines of their own and this might reduce NMDC sales
I think its to counter this that NMDC is now going upstream into steel production. -
Private players with mining leases will actively maximise iron ore production & hence their profits as their lease term nears expiry in 2020 leading to a temporary surplus in the market
So considering all the above it, on balance, seems a good long term investment with a decent guaranteed div yield while the above scenario fructifies.
I would welcome feedback from members who have contrary opinions or who could point out any factors I have missed.
Some of the ref material as below
NMDC- Pick of the Week -050218.pdf (404.3 KB)
NMDC-08012018.pdf (321.2 KB)
Disclosure: I havent invested yet but am planning to.
