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Steel plant demerger to unlock value

Board approves demerger of the steel plant

* NMDC’s board has approved the demerger of its steel plant to NMDC Steel.

* Post demerger, the government would invite investors to commission and operate the plant.

* NMDC would now need approvals from the NCLT and the exchanges for the demerger of its steel plant.

* The management in its 4QFY21 earnings call had said that the steel plant demerger process is likely to be completed by Dec’21. If everything goes smoothly, it expects the process to be completed in FY22. Post demerger, shares of NMDC Steel would be listed on the exchanges.

* Consideration: NMDC would issue one share of face value of INR10 of NMDC Steel against one share of face value of INR1 held in NMDC.

* NMDC’s 3mtpa steel plant has a flat steel production capacity of 2.89mtpa and its product mix comprises of HRC, HR plates, pipes, cylinders, and Auto grade sheets (as per the original plan). The plant, however, doesn’t have any backward integration.

* While NMDC’s board has guided at a commissioning of the plant in Dec’21, we have not factored in the same. We expect the commissioning to be delayed further as government intends to commission the same after inducting a strategic investor in the plant.

Valuation and view:

We expect the demerger to lead to value unlocking as the market is not ascribing any value to the steel plant currently. NMDC has invested ~INR180b in the steel plant. We expect a market valuation at 25% of the book value, i.e. INR45b (INR16/share). We reiterate our Buy rating with a TP of INR215/share.

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