Navratna company National Mineral Development Corporation’s (NMDC) shares were in a free fall on Thursday. They tanked 20% on the bourses to touch a new 52-week low of ₹ 92.25 on the National Stock Exchange (NSE). This happened because the shares started trading ex-steel business, due to a demerger.
NMDC Demerger
NMDC’s demerger of its steel business has been in the news for more than two years and it has reached its last stage. The share price of a company immediately falls after a demerger, because the assets belonging to the parent company are removed from its books and added
to the newly formed(demerged/subsidiary) company. This lowers its book value. The company so formed has enormous potential for growth, but it is also subjected to risks.
Soon after the shares started trading ex-NMDC Steel, there was a spurt in volumes and the shares surged 18.21% to reach an intraday high of ₹ 109.05. Thereafter, the scrip closed at ₹ 104.60 apiece. 3,85,99,184 shares changed hands on the NSE by Thursday’s closing bell.
Record Date
October 28, 2022, is the record date for the demerger. Eligible shareholders of the company will receive one share of NMDC Steel (face value ₹ 10 each) for every share of NMDC that they hold as of the record date. Further, the steel business will list separately on the bourses, after receiving the necessary approvals
Demerger Scheme
The company’s board of directors, on July 13, 2021, approved the scheme of arrangement between the company, NMDC Steel, and their respective creditors and shareholders. This included the demerger of Nagarnar Iron & Steel Plant (NISP) at Nagarnar, Chhattisgarh, among other things.
This plant will be demerged from NMDC to NMDC Steel, which is a wholly-owned subsidiary of NMDC at present. NMDC’s assets worth ₹ 18,650 crore and liabilities worth over ₹ 1,600 crore will be demerged to NMDC Steel.
What are analysts saying about NMDCs demerger?
ICRA, a rating agency, said that they expect the company’s liquidity profile to remain very comfortable given the consistent track record of strong cash flow from operations from the mining business. Further, the company has the availability of large unencumbered cash balances of Rs 6,850 crore as on March 31, 2022, and adequate buffer in the form of unutilised credit lines.
ICRA added that NMDCs instruments ratings continue to remain under ‘watch with negative’ implications.” This indicates that there is uncertainty over the debt servicing arrangement to be made by NISP in the initial period post its demerger.
The debt servicing would be done by NMDC till the demerger. However, the obligation for the rated debt would shift to the new entity once the demerger is complete.
NMDC is engaged in the business of oil exploration and production of iron ore, and diamond, production and sale of sponge iron and generation and sale of wind power. The company produces around 42 million tonnes per annum of iron ore.
It is a large-cap company with a market capitalization of ₹ 30,864 crores. Its shares are trading at a Price-to-equity ratio of 5.02, which is significantly below the industry PE of 9.32. Therefore, the stock might be overvalued. NMDC has an excellent return on equity of 28.92% and an excellent dividend yield of 11.27%. Further, it has an ideal debt-to-equity ratio of 0.10.
Written by Simran Bafna
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