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Rising Over Cycles

The company has been an outperformer even during the worst period of the commodity cycle

Profile
National Mineral Development Company (NMDC) is the single-largest iron ore producer and exporter in India. Iron ore production contributes 95 per cent of its current revenue. It has an ambitious plan of spending Rs 26,000 crore to transform itself into a “multi-faceted organization”. Besides ramping up investing in exploration, the company plans to create a foothold in the steel and power sector manufacturing. It also has diamond mines in Madhya Pradesh.

Fundamental Performance
Unlike most commodity players, NMDC does not directly export to Chinese markets (though contract prices are influenced by Chinese demand). By going in more for long-term contracts, NMDC now has negligible exposure to spot iron ore prices, but plans to increase it. But going long saved the day for the company as it was relatively insulated during the recent commodity downturn. Its operating margin during the December, 2008-March, 2009 period, the bottom of commodity cycle, was an impressive 73 per cent.

Over the past 5 years it has increased profits at a scorching pace of over 50 per cent. From being just a Rs 1,500 crore company, it now has an annual turnover in excess of Rs 7,500 crore. It has got close to Rs 12,000 crore in cash reserves, which translates into Rs 30 per share.

Stock Performance
Over the past 5 years the stock appreciated phenomenally. Its annualized rate of return is close to 90 per cent. Moreover, with government mulling plans to divest its stake in the company, the share of the public is set to increase from a minuscule 1.6 per cent. This would provide the near-term trigger for the stock to rise. Currently, the stock is trading at yield of 0.61 with a PE of 34.47 vis-à-vis a PE of 11 of its closest peer, Sesa Goa. But factoring in its near monopoly status with a 65 per cent market share, while Sesa Goa has got just 30 odd per cent, not only does the PSU have better operational numbers, its proposed diversification plan would also ensure it emerges a much stronger player.

History
NMDC was incorporated in 1958 with the express purpose of ensuring that the country’s resources are used for the benefit and enhancement of domestic industries. Currently, it is under the guidance of Ministry of Steel.

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Alse see: National Mineral Development Company (NMDC)
This article was previously published in October 2009 issue of Wealth Insight