Mining companies like Coal India, Nalco trading below 5-year average valuations may be a good bet

ET INTELLIGENCE GROUP: If you are a contrarian, state-owned and even some private mining companies could be a good bet — and maybe safe as well.

Companies such as Coal India, Hindustan Zinc, Gujarat Mineral Development Corporation (GMDC), National Mineral Development Corporation (NMDC) and National Aluminium Company (Nalco) are trading significantly below their 5-year average valuations due to weak commodity prices. High cash (around 50% of market capitalisation) will limit their downside, and investors with long-term horizon and LIC would find these shares attractive for their high dividend paying policies.



If fall in commodities bottoms out sometime later this year — unlikely in the near term — these could offer good returns to their investors.

Unlike metal companies, which have high debt and are seeing losses in the weak commodity environment, mining companies have managed to sustain their profitability and cash flows. All the mining companies mentioned above are debt free and have huge cash on their balance sheets.

Interestingly, after underperforming the benchmark indices — Nifty and Sensex — most of these mining companies have given positive returns in the past one month, when Nifty and Sensex were down by 4%. Government’s divestment plans could be an overhang, but the divestments are unlikely to happen at such low prices.