Recent declines in the stock prices of the three mining companies, Coal India Ltd (CIL), MOIL Ltd and NMDC Ltd, have led to questions in the minds of investors as to which company can provide higher upside from here.
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We analyzed all the three miners on different factors categorized under the parameters of industry (market share, end-user dependency and mining tax), business (mine life, risk to volume growth, immunity to price declines and staff cost) and valuation (enterprise value to earnings before interest, tax, depreciation and amortization). Our analysis points out that NMDC could be a winner among the three.
On the industry front, we believe CIL is better placed as compared with MOIL and NMDC as the company is dependent on the power sector, which is relatively stable than the steel sector. However, the upcoming 26% mining tax will hurt CIL the most. It should be noted that CIL spends 5% of its net sales (18% of its net profit) on corporate social responsibility (CSR), which could be reduced to partially mitigate the impact of mining tax. Further, it could take some price hikes to partially offset the impact of mining tax.
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On the volume growth front, NMDC scores the best as it is poised for the highest volume growth over FY2011-13 compared with CIL and MOIL. MOIL’s volume growth is at lower risk as its mines are located in Maharashtra and Madhya Pradesh, which have a relatively well developed infrastructure.
However, even if NMDC misses its volume growth target, the company’s volume growth would still be higher than MOIL and CIL.
On the pricing front, we believe CIL and NMDC have an advantage as they sell their products at a significant discount to international benchmarks. Although absence of government intervention in regulating manganese ore prices has given MOIL the leeway to sell its product at market-driven prices, we believe oversupply in the manganese ore market and huge inventory build-up should mute price hikes for MOIL over the coming year.
NMDC scores over CIL and MOIL on the valuation parameter front. While we have seen significant declines in the stock prices of all three firms—CIL, MOIL and NMDC, we believe NMDC’s better-than-expected first half of FY12 performance and robust growth prospects do not warrant a steep decline in its stock price. While risks to NMDC’s financial forecasts are limited, CIL could disappoint on the production front and higher-than-expected wage hikes could dent its profitability.
In our view, although MOIL’s valuations are attractive, there is a downside risk to its sales volumes targets; also, the stock lacks near-term catalysts. For NMDC, despite robust first half of FY12 performance, it is currently trading at a significant discount to its historical trading range.
Hence, we recommend investors to buy NMDC at these levels.
Edited excerpts from a report by Angel Broking Ltd. Comment at mintmoney@livemint.com
Graphic by Sandeep Bhatnagar/Mint