NMDC spent a total of Rs 20,000 crore in setting up a 3 million tonne per annum (mtpa) steel plant at Nagarnar that was not only draining cash from the high-margin iron-ore business, but was also impairing return ratios. Demerging the steel asset has been the right strategy, Emkay Global said.
The domestic brokerage believes that apart from unlocking value for shareholders, the move will also materially improve NMDC’s return profile, now that the big-ticket item has moved off its balance sheet.
NMDC Steel demerger
NMDC demerged its steel asset of 3 mtpa, with a record date of October 28. Shareholders, as on the record date, have been allotted shares in the resultant company (i.e. its steel asset, namely NMDC Steel), equivalent to their stake in NMDC. Hence, for existing shareholders as on record date, valuation of the steel asset is also important. The GoI has also initiated the process of divesting its entire stake of 60.8 per cent in the steel asset to a strategic investor, Emkay noted.
Iron ore biz attractive
Emkay said NMDC’s iron-ore business remains attractive. NMDC’s mines have high-grade, low-impurity iron-ore which, when coupled with favourable geological conditions, are placed among the lowest cash-cost mines globally, it said.
“At current production rate, NMDC’s reserves can last for 40 years, although further drilling would establish more reserves. NMDC can grow its mining/evacuation capacity, from 48/51mtpa now to 67/80mtpa over the next 3 years, although we have built-in only 48 mt volume in FY25E,” Emkay said.
The NMDC management is also considering setting-up a sizeable pellet business, which is low capital cost forward integration. Pellets, Emkay said, have good global demand.
“A large foray by NMDC into the pellet business would act as a natural hedge for any volatility in its iron-ore sales volume due to business cyclicality, etc. Price of NMDC’s current iron-ore fines is at a 20 per cent discount, as per the export parity pricing method, implying scope for price to increase from the current Rs 3,900 per tonne for iron-ore fines,” it said.
Seaborne iron-ore
Emkay said a majority of the high-grade, global seaborne iron-ore is supplied by a handful of players, mainly from Australia and Brazil. To that extent, it believes the industry is a snug oligopoly, with inherent pricing power.
“Iron ore in India (and more so for NMDC) is sold on an export-parity basis. While export parity pricing by itself is not advantageous for NMDC, there is a good correlation with global seaborne iron-ore prices; hence, NMDC too would indirectly benefit from this oligopolistic setup. China and the developing world’s reliance on steel scrap increasing to a point where it dominates iron-ore usage is still quite some distance away,” it said.
The brokerage values NMDC on FY25E EV/Ebitda of 4 times at fair value of Rs180 share. It implies FY25E P/E of 8.5 times and free cash flow (FCF) yield of 12 per cent.
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