=DJ FOCUS:NMDC Follow On Offer Unlikely To Garner Strong Investor Appetite

By John Satish Kumar

Of DOW JONES NEWSWIRES

MUMBAI (Dow Jones)--The government's US$2.13 billion divestment of a stake in iron ore miner NMDC Ltd. (526371.BY), in one of India's largest equity offerings ever, has been offered to investors at a significant discount to current prices, but it's unlikely to be enough to drum up strong investor support, say analysts.

The government's sale of an 8.38% stake in NMDC was priced Monday at INR300-INR350 per share.

The sale opens for subscriptions Wednesday, with the up to INR96.75 billion raised at the top end of the range likely to go some way towards funding a budget deficit that is 6.9% of India's gross domestic product this current fiscal year. The sale would also help broaden the shareholder base of a stock that is currently just 1.7% held, mainly in the hands of insurers.

But even though the 13%-25% discount to Monday's closing prices exceeds the around single digit discounts of the recent sales, this follow-on offering isn't likely to be heavily subscribed, analysts say, because the deal is still expensive compared with NMDC's global peers. The public offer price is, at the top end, still below the Jan. 19 level of INR571.80, a 52-week high, but current prices, say analysts, are deceptive.

"In our view, the current stock price does not reflect the true value, given the low free float at just 1.7%. We expect the potential price discovery to occur during the upcoming follow-on public offer," Macquarie's Rakesh Arora and Samidha Gehlot said in a note.

Macquarie's fair value on the stock is INR241, while CLSA values the company at between INR172 and INR219.

According to its red herring prospectus, NMDC currently trades at a hefty 34.7 times its estimated earnings for the current fiscal year.

At the low end of the price band, at INR300, and assuming a 50% hike in the cost of long term contracts that will renegotiated in April, NMDC trades at forward earnings of 17.8 times for fiscal 2011, according to CLSA. Its closest domestic peer Sesa Goa Ltd. (500295.BY) trades at 9.7 times, international peer, Brazil's Vale S.A. (VALE) trades at 12.2 times, and BHP Billiton Ltd.(BHP.AU) trades at 11.9, according to Credit Suisse.

On a price-to-book basis, NMDC trades at 7.1 times at INR300 a share compared with 3.1 times for peer Sesa Goa according to the estimates of domestic brokerage Centrum.

The move to offer a seemingly wide discount comes in the wake of two earlier divestments in state-owned companies last month where the government had offered much lower discounts and saw the share sales garner a lukewarm response.

The $1.8 billion follow-on public issue of NTPC Ltd. was subscribed only 1.2 times while the $755 million Rural Electrification Corp offer was subscribed 3.12 times, after having been priced at a discount of 5% and 8%, respectively, to their market prices. Retail investors, who usually flock to share sales in state-owned firms for their attractive pricing, mostly stayed away.

Still, the company has several factors going for it, say bankers and analysts. Iron ore is an asset that's in great demand, said one, and specialist funds will likely buy in. The company also has high-quality iron ore, and plans to invest INR250 billion to vertically integrate into steel production in the next few years. That expansion is likely to be mostly funded by internal resources and expectations that long-term contracts, which form 90% of the company's output, will be renewed at least a 50% premium to last year's prices.

   -By John Satish Kumar; Dow Jones Newswires; +91-22-61456118; john.kumar@dowjones.com

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(END) Dow Jones Newswires

March 09, 2010 06:16 ET (11:16 GMT)

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