Why NMDC offer is a good buy

State-run iron ore miner NMDC launched an Offer for Sale (OFS) to dilute 10 per cent stake in the company on Wednesday. The disinvestment through OFS route will close at 3.30 p.m. today and if fully-sold, it would fetch Rs 5,828 crore to the cash-pressed exchequer.

Shares in the NMDC recovered after a negative opening today. The stock traded with 2 per cent gains at Rs 161.20 on the BSE at 10.08 a.m.

Prasad Baji, senior VP (institutional equities-research) at Edelweiss Securities says there's 10-15 per cent upside in the stock considering that it is priced at a discount. Cash rich balance sheet and low iron-ore cost are advantages though stagnant volume growth continues to be a challenge.
NMDC has set a floor price of Rs 147 per share, a 7.7 per cent discount over Monday's closing price of Rs 159.30 per share on the BSE. The stock has a face value of Rs 10. In all, 39.65 crore shares have been offered for sale, out of which one-fourth is reserved for mutual funds and insurance companies.

No single bidder, other than mutual funds and insurance firms, would be allocated more than 25 per cent of the total offer.

NMDC is the second disinvestment candidate in the current fiscal in which the government plans to raise Rs 30,000 crore by selling stakes in around a dozen PSUs. On November 23, it had garnered Rs 808 crore by selling 5.58 per cent of its stake in Hindustan Copper.

Here are five reasons why the stock may be a good buy.

1) Attractive valuations and returns: NMDC trades at 7-times FY14 Earnings per Share as compared to the industry average of about 18-times. NMDC's operating margins are excess of 90 per cent and net profit margin exceeds 60 per cent. The return on equity is 43 per cent, higher than global peer average of 35 per cent. NMDC is well positioned to further step up dividend payout

2) High free float: The government, which had 90 per cent stake in NDMC at the end of September, is cutting its stake by 10 per cent. This will lead to increase in free float and liquidity in the stock. NMDC will have the largest market capitalization in Indian metals and mining space.

3) Chances of entry into benchmark indices: NMDC will have reasonable a chance of entering the Sensex and the Nifty, which will increase flows into the stock and drive volumes.

4) Strong balance sheet: NMDC has a strong balance sheet with cash surplus of Rs 22,500 crore.

5) Growth plans: The Company has a capex plan of Rs 15,500 crore for setting up 3 MTPA steel plants at Nagarnar and Chhattisgarh.

Disclaimer: Investors are advised to make their own assessment before acting on the information.

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