Our Call. MOIL — good for the long haul

The global commodity market is melting, with prices of coal, iron ore and manganese hitting new lows. Long-term investors can make the most of this opportunity to buy into quality Indian miners with strong fundamentals. State-owned MOIL, the largest domestic producer of manganese ore, is one such pick.

The company’s upcoming expansion will drive its revenue higher in the next two years. Its position as the market leader, attractive margins and growing cash pile stand it in good stead. The stock is also attractively valued — the current price of ₹310 discounts its trailing 12-month earnings 10 times — at the lower end of its three-year historical average of 10-12 times.

The company holds 73.5 million tonnes (mt) — about 44 per cent of the country’s reserves — of medium and high-grade ore, spread across ten mines. In 2013-14 MOIL produced 1.1 mt of ore, accounting for over 40 per cent of the local production. About 2.57 mt of manganese ore was imported in this period despite the low level of steel output.

A recent report by the Indian Bureau of Mines projects manganese ore demand in 2020-21 to be over 9 mt and estimates local production at 5 mt. MOIL, being the leader in the segment, is set to benefit from this growth.

To meet the demand, the company plans to double its output to 2 mt by 2020-21. It expects to produce 1.5 mt annually by 2016-17 by expanding its existing mines. MOIL has received licences to prospect around 600 hectares (11 blocks) near its existing mines in Maharashtra, to open around four new mines. Besides ore, MOIL also produces value-added products such as ferromanganese and electrolytic manganese dioxide, which contribute around 10 per cent of its revenue.

The company plans to increase its ferro manganese plant capacity from 10,000 tonnes per annum to 45,000 tonnes per annum.

It has also entered formed a joint venture with Steel Authority of India and Rashtriya Ispat Nigam to produce manganese alloys.

The company has a large cash balance of ₹2,792 crore (as on March 31, 2014) to comfortably fund its proposed expansion.

One concern, however, is the fall in manganese prices. Due to availability of low-priced imported ore, MOIL reduced prices of various grades by 5-10 per cent for the December quarter. However, in the recent September quarter, MOIL reported 10 per cent higher overall realisation, thanks to a higher share of better-grade ore.

Global manganese prices are at a five-year low and are down 50 per cent from their peak in 2011. Prices are likely to stabilise and inch up in one or two years as steel demand in the US picks up.

At over 45 per cent, MOIL’s net profit margins are enviable. Even with the announced price reduction, the management expects margins to hold at these levels for 2014-15. The company also pays dividend regularly. For 2013-14, it paid ₹7.5 per share, a dividend yield of 2.4 per cent at current prices.

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