NMDC FPO gets poor response on day one

Like its predecessors REC and NTPC, mining major NMDC, the third government-owned company to hit the markets this year, received tepid response on the first day of follow-on offer (FPO).

According to bidding details available on the National Stock Exchange website, the FPO was subscribed only 0.17 times with bids received for 57.12 million shares. The data also show that the bids were at the lower end of the price band (Rs 300), suggesting that investors chose to stay away owing to concerns over high valuations.

The FPO comprises 332.24 million shares in the price band of Rs 300 to Rs 350. The entire issue is being made through the book-building route after the French auction system used for the REC and NTPC FPO’s failed to attract institutional investors. The FPO closes on March 12.

Meanwhile, shares of NMDC that have been losing ground for the past few days rose marginally on Wednesday. On the Bombay Stock Exchange, it closed at Rs 379.85, up 1.1 per cent. On NSE, it ended the day at Rs 380, gaining Rs 2.35. NMDC’s day one performance, however, was similar to that of other FPOs from state-owned companies.

NTPC's FPO was subscribed 0.77 times on its opening day and just 1.2 times on the final day.

While Rural Electrification Corporation FPO was subscribed 0.2 times on the first day and finally subscribed 3.14 times.

In both cases, institutional investors like state-owned Life Insurance Corporation stepped in to take up the slack from retail investors.

Broking firms say they are not very enthusiatic about the offer price for the state-run mining firm. "Our valuation of NMDC throws up a range of Rs 173-215/share using NPV methodology (Rs 173/share), as well as applying a premium of 25 per cent to global peers using financial year 2012 estimates EV/EBITDA multiple (Rs 213/share) and P/E multiple (Rs 215/share)," said HDFC Securities in a note to its clients on Wednesday. The brokerage's valuations are based on the assumptions that increase in iron ore price realization would be around 40 per cent and expected capacity of 50 million tons by 2014.

Angel Broking also has an "avoid" recommendation on the offering. "We recommend an Avoid on the FPO, as at the lower price band the stock will trade at EV/EBITDA of 12.6 times and 9.6 times FY2011E and FY2012E, which is at a significant premium to its peers," it said in a report released on Tuesday.