With the Sensex fast approaching the 32,000 levels, it is difficult to find stocks that can add value to the portfolio. IT and Pharma have several headwinds, while banking stocks are bogged down by NPA problems and FMCG stocks have turned pricey. There maybe some value left in mining stocks and here is why.
Cash rich business
Mining companies generally have very high margins and are cash rich businesses. Most of these companies are also debt free companies. For example, Coal India and NMDC are both debt free companies and have large cash on the books. They also have positive cash flows, which is another advantage.
Low business risk
Most of these companies have access to mines that have the resources for many more decades. This makes them interesting plays, because of assured supply, but also because the business model is virtually risk free. There is very little scope of commodity prices crashing, and even then the high margin business ensures that some of these companies can easily absorb the price shocks.
Not very expensive
Some stocks like Coal India are not very expensive. For example, the shares are now trading at just Rs 254, against a 52-week price of Rs 340. Shares like NMDC are also still a little faraway from their 52-week highs. Most of these shares are also trading at reasonable p/e multiples, making them inexpensive. A sponge iron player like Tata Sponge Iron too is going cheap at the current valuations. Coal India is trading at a p/e of 12 times one year forward earnings.
Best on dividend yields
Mining stocks like NMDC, Coal India and Hindustan Zinc can give dividend yield ranging from 4 per cent to 8 per cent. For example, if Coal India retains the same dividend as last year, it is highly possible that the company could give you a dividend yield of near 8 per cent. On the other hand NMDC too can give a decent dividend yield though the recent sharp surge in share prices, may reduce the yield somewhat. Given the sharp gains in most sectors, mining stocks may hold some value going forward.
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