I would like to know the fundamentals of NMDC. Will it be worthwhile investing in this company?
- Bimal Sood
NMDC is India’s single largest iron-ore producer and exporter. It has always remained focused on selling iron ore in the Indian market only, in line with the Indian government’s goal of increasing domestic steel production and making iron ore available at reasonable prices to Indian steel producers. It came out with a new pricing mechanism in FY11.
According to it, NMDC will offer some discounts to domestic players, but by and large its pricing will be aligned with global prices of iron ore.
In FY11 NMDC recorded its highest ever topline and bottomline on account of increased offtake from domestic customers, improved rake supply from the railways, and high price of iron ore. However, on account of various regulatory hurdles and Maoist activities in Chattisgarh, the company has reduced its iron ore production target for FY15 by 20 per cent to 40 million tonnes.
Recently the Supreme Court allowed NMDC to produce 12 million tonnes per annum (mtpa) from its two mines. Earlier, on July 29 a ban on mining activities had been imposed in Bellary district in Karnataka due to illegal mining activities in the area. Before the ban, the company dispatched around 5 million tonnes from the two Karnataka mines, as production at Kumarswamy was restrained by a Karnataka High Court order. The company recently ramped up its production from the two mines to 28,000-30,000 tonnes per day from its earlier production level of 21,000-22,000 tonnes per day.
Recently NMDC and Australia-based Legacy Iron have decided to jointly invest around $1.3 billion on developing Mt. Bevan iron ore project in Western Australia. NMDC will buy 50 per cent stake in Legacy Iron Ore for nearly 19 million Australian dollars. This will be the PSU’s first-ever overseas acquisition.
In recent times, NMDC has been scouting for resources globally as domestic capacity expansion has been slower than expected and new mining licences are hard to come by within the country.
NMDC has a strong balance sheet. It is a zero-debt company. Over the last five years, its total income grew at a compounded annual growth rate (CAGR) of 26.3 per cent and profit after tax at 28.9 per cent. It has been generating steady cash flow over the last two years. With very little capital expenditure and no buyouts the company’s cash level has been rising year on year. Its cash and bank balance stood at Rs 17,228.06 crore at the end of FY11. Over the last five years this figure has grown at a CAGR of 40.8 per cent.
Historically, NMDC has maintained a dividend payout ratio in the range of 20-22 per cent. In FY11 its dividend payout ratio stood at 20.13.
NMDC is currently trading at a price-to-earnings (P/E) ratio of 10.86, which is at a discount to its five-year median P/E of 24.32. It has posted a five-year CAGR growth of 28.9 per cent in earnings per share. This gives it a price-to-earnings to growth (PEG) ratio of 0.37 times. You may buy this stock with at least a three-year investment horizon.
This article was originally published on November 21, 2011.
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