Is India's most expensive stock...really expensive?

Not many may have heard of Orissa Minerals Development Corporation or OMDC, oddly enough, considering it is India’s most expensive stock in absolute terms at Rs 29,000 a piece. But here’s the real leap-out-of-your-seat fact: OMDC’s life high is Rs 92,220 a share, which it scaled on November 15, 2010. While it’s all-time low is Rs 20,475, which it made on August 4, 2010.

And strangely not many of the major brokerages are tracking OMDC.

Let’s start with the basics. The company's trailing 12 month EPS is Rs 257.49 on a low equity base of 6 lakh shares. This translates into P/E of 106 compared to industry average of 5, way too expensive. The face value per share is Rs 10. The book value of the stock is Rs 13,325, converting it into P/BV of more than 2.

Rashtriya Ispat Nigam, is the parent company with 50% stake, followed by LIC, second largest shareholder with 15% stake. A major trigger for RINL could be its listing once the cloud of uncertainty over the sector fades away. RINL is likely to top the list of government’s divestment to-dos. 

Major concerns

All six mines of the OMDC are shut owing to lease expiry. It also needs further clearances from the government for the same. Its sponge iron plant production, a joint venture with East India Minerals Ltd, is at a standstill due to non-availability of iron ore.

But the main concern, going forward, could be the draft mining bill that is likely to erode profits, if becomes a reality in its current form. 

The board of OMDC deferred stock-split proposal twice in last one month. Earlier, the board at a meeting held on November 9, 2011 deferred stock-split proposal, citing absence of government nominee director at the board meeting. Liquidity is a key issue, so stock split/bonus will be an ideal option for the company to increase liquidity and affordability for investors.

OMDC shining?

If one had to go by the management say its latest annual report, then OMDC share can reach mind-blogging valuations ahead.

“All the six mines are currently inoperative and it is expected that one mine, namely Kolha Roida, may come in operation in third quarter of the current financial year 2012 and all remaining five mines may be operative by the end of the financial year, so main benefit will accrue in next financial year, 2013,” the report said adding, “These achievements will lead to expected productions of 10 MTPA of iron ore and 1 MTPA of manganese ore in near future. It is also planned to set up 2 MTPA iron ore beneficiation plant and 2 MTPA pelletisation plant.”

Based on the management talk, the cash EPS for FY13 works out close to a staggering Rs 24,000. 

FY13E	Iron Ore	Manganese
Production	10 MTPA	1 MTPA
Realisation (in Rs per tonne)	Rs 4000/tonne	Rs 8000/tonne
Sales (Rs in Cr)	4000	800
OPM (%)	50%	50%
Gross Profit (Rs in Cr)	2000	400
Interest (Debt-free)	-	-
Tax rate @ 40%	-800	-200
Net Profit (incl Depreciation)	1200	200
Shares	0.06	0.06
Cash EPS (Rs)	20000	3333
Other Income (Rs in Cr)	50
EPS on other income	833
Total Cash EPS (Rs)	24000

 

OMDC is a debt free company. Also, it has reserves of close to Rs 800 crore of which Rs 700 crore are in fixed deposits. The other income is the interest earned on fixed deposits assuming an annual interest return of 8%. The realisation figures are based on polls of various analysts.

Adding two and two- reserves of Rs 800 crore and FY13 expected profit of Rs 1400 crore, the total reserves comes to be Rs 2200 crore. Considering the current market-cap is Rs 1800 crore, the stock is trading at a mind-boggling discount to future estimates. 

In simple terms, the company is up for grabs at almost no cost as returns are going to be far greater in the future.Again, the whole valuation parameter is based on the management comments. Therefore, one should not jump the gun and start buying in lots.

An investor should wait for further clarity on news of mining license clearance and then take a call.

The company clocked an EPS of Rs 3030 in FY09. Assuming conservative industry P/E of 5 on FY13 expected EPS of Rs 24000, one can do the math on the target price. However, in the present gloom and doom scenario, shareholders of the company can just hope for the best. 

-Riken Mehta, Sagar Salvi