NMDC Ltd, a Navratna PSU company recently demerged its steel plant at Nagarnar and the entity got listed on the bourses earlier this week. NMDC had spent a total of ₹ 20,000 crores to set up this plant with a capacity of 3 million tonne per annum (mtpa).
Brokerage firm Emkay Global said that this facility was not only draining cash from the high-margin iron-ore business but was also impairing return ratios. It added that demerging this entity has been the right strategy.
Emkay Global believes that apart from unlocking value for its shareholders, this move will also materially improve NMDC’s return profile, as the entity has moved off from its balance sheet.
NMDC is engaged in the exploration and production of iron ore and diamond. In addition, it produces and sells sponge iron and is engaged in the generation and sale of wind power.
The brokerage said that NMDC’s iron-ore business remains attractive as it mines high-grade, low-impurity iron ore, which when coupled with favourable geological conditions is placed among the lowest cash-cost mines globally. Its reserves can last for 40 years at the current production rate. Moreover, further drilling would establish more reserves.
Moreover, the company’s management is also considering setting up a sizable pellet business, which is low capital cost forward integration. This will act as a natural hedge for any volatility in its iron-ore sales volume due to business cyclicality, according to the brokerage.
As far as sea-borne iron ore is concerned, a majority of the high-grade ore is supplied by a handful of players mainly from Australia and Brazil. Therefore, the industry is an oligopoly with inherent pricing power.
NMDC’s shares were trading at ₹ 112.95 apiece at 11:13 AM on Friday. Emkay Global has a buy call on its shares with a price target of ₹ 180, translating to an upside of 59.36 percent.
Written by Simran Bafna
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