NMDC Says Steel Plant Demerger May Take At Least 8-9 Months
The board of NMDC Ltd. has approved the demerger of its upcoming steel plant in Chhattisgarh and said the process will take at least eight to nine months to complete. This, at a time the coronavirus lockdown has disrupted sales of India’s largest iron ore miner.
The state-owned company has incurred a capital expenditure of Rs 17,000 crore for the 3-million-tonne-per-annum integrated NMDC Iron & Steel Plant in Nagarnar, Chhattisgarh, it said in a conference call after announcing earnings for the June quarter. The unit, it said, is likely to commission production next year.
NMDC’s sales volume declined 28% year-on-year to 6.28 million tonnes in the April-June period. Its profit and revenue fell 55% and 41%, respectively, during the quarter. While the company’s operating profit slumped 60% over the year ago to Rs 750 crore, its Ebitda per tonne dropped 44% to Rs 1,201.
According to analysts from brokerages, including Edelweiss Securities and BoFA Securities, this move will help unlock significant value for the stock, perhaps in the range of Rs 50-55 per share given the cost of capital incurred. Shares of NMDC have rebounded 71% from their March low, but are down 17% so far this year.
To be sure, this isn’t the first time the company has tried to demerge the steel plant at Nagarnar. In October 2017, the Government of India accorded in-principle approval for its strategic disinvestment but the company scrapped the plan later.
- Pending capex for the plant is Rs 4,000 crore, including price variation clauses (Rs 1,000 crore)
- Balance funding will be through leveraging the steel plant
- The steel plant will have enough cash to carry its business without recourse to NMDC’s cash pool
- No mines will move to the steel plant
- NMDC’s Deposit-13 and 4 have been linked to supply to the steel plant, but not captive to the steel plant
- No timeline for completion of coke oven by-product plant
Here’s what brokerages have to say about NMDC’s move to demerge steel plant:
- Decision to demerger might pave way for sale of steel plant
- This will result in value unlocking of steel plant
- Steel plant gains currently not valued into stock price
- Non-completion of certain facilities led to delay in commissioning
- The value of capex works to Rs 55 per share
- So far no value has been ascribed to the plant
- The street is ascribing negligible value to the steel investment
- No value assigned due to significant commissioning delays and lack of visibility on completion
- The value of capex works to Rs 49 per share of the steel investment
- Demerger could help unlock this value
Of the 22 analysts tracking NMDC’s stock, 17 have a ‘buy’ rating, implying a potential downside of nearly 2-3%.