Note: This post was originally written on 11/06/2013.
Market loves to chase stocks which are fancied madly by people mainly because of its fancy type of business model. They deal in goods which catch the imaginations of people and these are viewed as goods something of a class different or higher than our routine goods like Pizza’s sold by Jubilant Foodworks. These stocks are given astronomical valuations of 40-50 PE ratio although most of the times goods sold by these are not good or healthy for people like Pizza’s, Maggi, Alcohol, cold drinks etc.
I have always found that most of the times entry barriers to these are comparatively low and business model can turn erratic. Like if properly planned, any Indian traditional health drink like Coconut water (packaged and processed) can give these expensive sugary cold drinks a run for their money.
The business of these houses run mainly on high advertisement, propaganda and linking of style quotient with these by masses. I am not against investing in these stocks but i feel these are always too overvalued for anyone to earn superlative returns unless he is one of the early mover in the stock, like, current stock price of Jubilant Foodwork at a PE ratio of 50 has already factored in high growth for next 3-4 years and given their portfolio i feel their growth would normalize after 5-6 years of high growth. Also anyone from their neighbour can develop his own version of Pizza and can compete with them like i read on that day that two Indians are selling Dosas etc to American people after modifying it to their taste.
But investors in their race for these hyped and fancied stocks always forget less talked and boring stocks but which have the potential to outlive these fancy ones. People find these boring as they belong to our normal life like Steel, rice or staple foods, resource rich like Mining. Most of the time entry barriers are high as capital requirements are high like in steel or rice.
One such stock is NMDC which have fallen all the way from the highs of 550 and 250 year ago to paltry 115 now. It is Indian mining Giant producing 15-20% of Indian iron ore production which have risen to 30% after the mining ban in Goa and karnatka. Its proven reserves as on today is around 12 billion tonnes with current production around 26-27 Million Tonnes and they have plans to ramp up it to 50 MT from 2015. At a production rate of 50 MT, these reserves are sufficient for 25-30 years. NMDC is adding to its reserves very fast every year.
Now to most interesting part, it is having a cash of almost 24000 cr in its books and its market value at present is 46000 cr, means half of its price (around 60 per share) is cash, so we are getting main business for just 55 per share at a PE ratio of 3.5. It has great plans for using this cash for higher return like they are building steel plants near their iron mining sites. India still import huge quantities (6 MT) of steel every year and given our requirement in the near future these imports are likely to touch 50 MT per year by 2020. It has already acquired the land for this plant in record six months by giving great rewards to villagers for their land and promising a job in the plant.
It is looking to acquire mines all around the world to meet Indian needs. For its steel plant, it has two captive coal blocks.
At present Indian mining is under huge stress due to local aggression, environmental issues. In india , land owners only have surfacial rights to their land, any mineral beneath it belongs to Govt. this is unlike USA where people have full rights to their lands which i feel is justified. So pvt companies can pay them and look for minerals. Also in india, Govt. takes the royalty from mining companies for their production and these royalty money goes to state or central Govt wallets which is then wasted on useless subsidies. The better way should be that this money should go to local panchayat or Municipal corp which then uses this for local development. I think this can kill issues related to Naxalism or Maoism.
Recession always is a result of misallocation of productive resources and market can correct itself after a period of low growth by adjusting to right levels of investment. When prices of commodities rise, many more jump into the bandwagon to ride the tide which result in over supply and thus prices drops and share prices fall and this is the time of entering into these as sooner the late jumpers would leave out resulting in normalization of production.
NMDC has given a Dividend of Rs. 7 this year, which is almost 7% better than FD return of around 6% post tax and with growth in steel and production this will only rise as our Govt needs funds to fund the fiscal deficit and high dividend income from PSU’s is one of the best option.
(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)