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NMDC Ltd is rewarding investors with a value unlocking opportunity. The final clearance to the much-awaited steel plant demerger was given by the company’s board on Tuesday.

The NMDC stock has risen about 4% in the past two trading sessions, undoing some of the corrections earlier in the run-up to an offer for sale (OFS) by the government.

“We expect the demerger to lead to value unlocking as the market is not ascribing any value to the steel plant currently," said analysts at Motilal Oswal Financial Services Ltd.

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Under pressure

The company has been investing in setting up a 3 million tonne per annum steel unit at Nagarman in Chhattisgarh. The commissioning is expected by the end of 2021. However, looking at the need of a strategic partner for running the steel plant, analysts were expecting some delays in commissioning.

NMDC has invested 18,000 crore in the steel plant and Motilal Oswal Financial Services expects a market valuation at 25% of the book value, which is about 16 per share. The demerger is also positive as it limits the liability of NMDC investors of any further investments and/or any delay in commissioning of the steel plant.

The demerger would also strengthen NMDC’s balance sheet (transfer of debt to NMDC Steel and reduce cash burn for the steel plant) and improve return ratios, said analysts at Sharekhan. The increasing cash flows could lead to higher dividend pay-out, too. Last year, the dividend stood at 7.8 a share, implying a 4.5% yield.

Investors, however, will have to wait for the demerger process to get completed as multiple approvals are required. The shares of NMDC Steel Ltd will have to be listed and the plant has to be commissioned after a strategic investor is roped in. It is only after this that investors reap the complete benefits of the demerger.

NMDC’s prospects remain sound with iron ore demand and realizations in India remaining firm. The firm is expected to report about 15% Ebitda per tonne growth in Q1, according to analysts at Motilal Oswal Financial Services.

The company is estimated to report per tonne realizations of around 8,167 against 6,174 in Q4FY21 and 3,088 in the year-ago period.

And the expected rebound in steel demand after the easing of lockdowns is expected to support its volumes.

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