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The Cash-rich Navaratna

India's largest producer of iron ore, NMDC boasts of high grade iron ore reserves. Find out if you should invest in it

NMDC is India's largest producer of iron ore and operates under the Ministry of Steel and is a Navaratna company. The company has high grade iron-ore reserves in abundance, with a ferrous content greater than 64 per cent, which is more sought after in steel manufacturing.

A very high scale production gives NMDC economy of scale and makes it the lowest cost producer in the world. The low cost feature can be attributed to the company's mechanisation of its mines, continuous focus on reducing cost of mining, seeking improvements in operational efficiency, including logistics, and its access to a large and inexpensive pool of labour and talent in India.

    Case for investment

  • It is the single largest iron ore producer with impeccable mining facility in the country
  • Plans to increase its existing capacity of 32 million tonne to 48 million tonne in by FY15

NMDC has planned to increase its existing capacity of 32 million tonne to 48 million tonne by FY15. In the short term, NMDC may also gain due to lack of supply created in the market due to recent ban on iron ore mining in Odisha.

However, there are concerns like the Naxalites threats, labour and transportation costs and effectiv renewal of its soon to expire leases. Rise in input cost can impact its position as a low cost producer. NMDC also has the risk of too much government regulations and interference in its business.

NMDC is debt free, cash rich and has a clean balance sheet supported by consistent growth in cash from operation, which makes it fundamentally attractive. Abundance of cash, low capex requirement and higher dividend payout translate healthy future cash stream from the stock. At current price level the dividends yield of 4.45 per cent and more than 25 per cent discount to its 5 year median price to earnings makes even its valuation attractive. Strong fundamentals, with short term glitches makes it a very long term investment candidate.