NMDC priced to sell in $2.6 bn offer

NMDC priced to sell in $2.6 bn offer

Mumbai: The government is betting that a deep discount for this week’s $2.6 billion share sale in NMDC, India’s largest iron ore miner, revives interest in a divestment programme that has thus far generated uneven interest.

The government has pencilled in revenue of $8.6 billion from sales of stakes in state companies in the recent budget for the fiscal year that starts on 1 April, part of plans to offload holdings in 60 state firms in coming years to raise funds for welfare programmes and narrow a fiscal shortfall.

“For any follow on offer, interest is based in relation to the market price. There is a steep discount now and the issue should get a good response from both retail and institutions," said Ambareesh Baliga, vice president at Karvy Stock Broking.

A government panel late on Monday set a price band of Rs300 to Rs350 for the follow-on public offer in NMDC, a discount of 13-25% to Monday’s closing price, sources told Reuters.

Retail investors and staff will get a further 5% discount on the final price. Previous share sales in state firms this year had discounts of between 5 and 8%.

While NMDC has been listed for decades, its float is tiny, with just 1.6% in the public domain. Coverage by analysts is limited, even though its market cap of $35 billion puts it among the top three listed Indian companies by market value.

India hopes investors treat the sale of 332.24 million shares, or 8.4% of NMDC’s equity, essentially as an IPO.

NMDC shares slid 6.8% to Rs373.50 on Tuesday, their lowest level in four months.

Lots at Stake

Much is riding on the NMDC offering, which at the top of its price range would be the third-largest ever share sale by an Indian company.

“The success of the government’s plan will depend on this issue. If this fails, the government will have a hard time selling its pipeline," said Deven Choksey, chief executive at K R Choksey Shares, which manages about $125 million for Indian clients, and holds a small portion of this in NMDC shares.

Other deals in the pipeline include a planned IPO by hydropower firm SJVN Ltd to raise $225 million, and a follow-on offering by Steel Authority of India Ltd to raise roughly $2 billion.

Michiel van Voorst, a Hong Kong-based portfolio manager with Robeco Asia Pacific, said NMDC was not high on his radar screen.

“We probably need more liquidity. Also, its relevant to compare to regional and global peers, and from our perspective, I would look at better-priced Australian companies."

NMDC accounts for 13% of India’s iron ore production, and is among the few state-owned firms with “navratna", or “nine gems", status that accords a large degree of financial independence.

At the top end of the price band, NMDC has an enterprise value of $20 per tonne of its mineral deposits, analysts said.

By comparison, Indian iron ore exporter Sesa Goa, part of the Vedanta group, trades at EV/tonne of $22. Global mining majors BHP Billiton and Rio Tinto, trade between $15-$18 per tonne of mineral resources.

“The stock should be priced around Rs350, if you consider the value of its mineral resources," said Deven Choksey of K R Choksey Shares.

NMDC produced 28.5 million tonnes ore in 2008-09, and holds proven reserves of 970 million tonnes.

It reported earnings of Rs8.6 per share for the 12 months ended January, with a price to earnings ratio of 57.6 according to its prospectus. The company has justified the high valuation with its high growth potential.

“We will continue to enjoy market support and good price realisations for years to come," NMDC chairman Rana Som told reporters at a roadshow in Mumbai last week.

“If we had the capacity, we could actually sell 60 million tonnes, compared to 30 now," Som said, referring to the strong domestic market, which accounts for 85% of its sales.

The miner expects to boost capacity to 50 million tonnes by 2014, from 30 million now, with three ore mines expected to be commissioned over the next three years, Som said.

Mixed Record

Prompted by the 81% rise in the country’s stock index, India in 2009 revived a plan to sell minority stakes in state firms, raising about $1.8 billion from sales in state-run Oil India and NHPC.

Conditions have been tougher this year, with the Sensex down 2% and a controversial “French auction" bidding system that has since been scrapped, weighing on demand.

Top power producer NTPC raised $1.8 billion in a share sale earlier this year that needed help from state run banks and insurers to be fully covered.

A subsequent offering by lender Rural Electrification Corp was covered by a more comfortable three times, raising $760 million.

Citigroup, Morgan Stanley, UBS, Kotak Mahindra Capital, Royal Bank of Scotland and Edelweiss Capital are lead managers of NMDC’s offer.