NMDC: Pricing its valuations

Low production costs, high margins allow the company to command a premium in the stock market.

The 12 per cent growth in steel consumption in May on the back of upbeat automobile and consumer durables demand has seen India’s largest iron ore mining company see an 80 per cent jump in profit for the June quarter. Revenues have grown 90 per cent to Rs 2,400 crore, according to the management.

Known to be one of the lowest cost producers of iron ore with an estimated cost of around nine per cent a tonne, the company is slated to increase its production capacity from 30 million tonnes to around 50 million tonnes in 2013-2014. It already has reserves of up to 1.5 billion tonnes with ferrous (Fe) content of around 65 per cent, which is favoured by steel makers.

NMDC has set out a Rs 26,000-crore capacity expansion plan with a three-million-tonne steel plant in Chhattisgarh. With Rs 13,000 crore available in cash, the expansion is not expected to run into any funding problems. However, these strong advantages seem to have been factored into the price.

NMDC is easily the most expensive iron mining company in the world. It trades at a valuation of around 25-35 per cent premium over its peers like BHP Billiton or Rio Tinto. But then, the premium is based on the fact that the company has iron ore with high Fe content and has been able to maintain operating profit margins of around 77 per cent — way higher than the peers at 26 per cent (Rio Tinto) and 36 per cent (BHP Billiton), both of which are large mining companies.

Even its Indian peer, Sesa Goa, has operating margins of around 55 per cent. So, some analysts believe that considering these operational advantages and a strong cash position, the premium is justified.

In addition, the company has managed to take advantage of rising international and domestic prices. Domestic sales contribute around 85 per cent to the revenues and have seen strong traction. For Japanese and South Korean steel mills, the company has doubled its prices to $121-138 a tonne. Hence, earnings growth is expected to remain strong on the back of increased demand and global prices.

The good times seem to have begun for the miner. But a translation of this into a re-rating could take some time.