Demerger of NMDC Steel: How should investors approach the stock?

The demerger of NMDC Steel will not only unlock the value for shareholders of NMDC, but also will also materially improve NMDC's return profile, now that the big-ticket item has moved off its balance sheet, according to Emkay Global Financial Services.

The brokerage initiated the coverage on NMDC with a "Buy" rating and 1-year forward target price of Rs 180. On Wednesday, the company's stock closed nearly 3% lower at Rs 115.75. So far this year, the shares have lost about 8%.

NMDC spent Rs 20,000 crore in setting up a 3 mtpa steel plant at Nagarnar which has not only been draining cash from the high-margin iron-ore business, but also impairing return ratios, Emkay said in a report

Key downside risks to the company include disruption due to instability in the Chhattisgarh region and regulatory uncertainty in terms of potential higher royalty demand from state governments.

The brokerage said the iron-ore business remains attractive as NMDC's mines have high-grade, low-impurity iron-ore which, when coupled with favorable geological conditions, are placed among the lowest cash-cost mines globally.

At current production rate, NMDC's reserves can last for 40 years, although further drilling would establish more reserves. Further a large foray by NMDC into the pellet business would act as a natural hedge for any volatility in its iron-ore sales volume due to business cyclicality.

NMDC would also likely benefit from the oligopolistic setup as the majority of the high-grade, global seaborne iron-ore is supplied by a handful of players, mainly from Australia and Brazil.

Shares of NMDC Steel recently made their debut on both the stock exchanges BSE and NSE. NMDC shareholders were allotted one share of NMDC Steel for every equity share held.

In October 2020, the CCEA gave its 'in-principle' approval to the demerger of the Nagarnar steel manufacturing unit from NMDC and strategic disinvestment of the resulting entity by selling the entire stake of the central government. Last year, NMDC had approved the demerger of NMDC and NMDC Steel.

Following that, the government on December 1, 2022, invited bids for buying a 50.79% stake in NSL. The balance 10% stake of the government would be offered to NMDC after the strategic buyer for the 50.79% stake is selected.

NMDC's consolidated net profit more than halved to Rs 904 crore for the December quarter, mainly on account of lower income. The company had clocked a net profit of Rs 2,047 crore in the October-December period of the preceding 2021-22 fiscal.

Its total income also tumbled to Rs 3,924.75 crore from Rs 6,026.68 crore in the year-ago quarter.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)