MOIL: Buy

Public sector manganese ore miner MOIL has had a poor run on the bourses. The stock has lost nearly 17 per cent over the last couple of months, and almost 50 per cent since the beginning of 2011.

This was mainly due to the sharp dip in global manganese ore prices — a fall-out of escalating concerns about the world economy and excess supplies.

MOIL’s average realisation per tonne fell from Rs 8,380 in the June 2011 quarter to Rs 6,279 in the March 2012 quarter. This has improved to Rs 6,852 per tonne in the recent June quarter.

A dip in realisations and rising costs took a toll on MOIL’s financials. Its sales in FY-12 fell 21 per cent while profits fell a sharper 30 per cent. The ongoing uncertainty in the mining sector after the government auditor’s report on coal allocations has added to the pain.

Solid franchise

But after the market punishment, the MOIL stock at its current price of Rs 236 presents a good buying opportunity for investors with a long-term perspective.

The valuation seems attractive with the stock trading at around 9.8 times its trailing 12-month earnings — lower than levels it has traded at in the past (around 11-13 times). Also, fundamentally, MOIL is a solid franchise with the wherewithal to ride out tough times. It is the country’s premier manganese producer accounting for more than 40 per cent of the ore production.

MOIL’s reserves mostly contain high-quality ore, which is in high-demand. The company is cash-rich with around Rs 2,100 crore as on March 2012 and has zero-debt. This provides it adequate leeway to fund expansion plans. Its low cost of operations has ensured that despite a dip in realisations over the last year, profitability still remains formidable. Operating margin in FY-12 was in excess of 70 per cent and net margin was above 45 per cent. Unlike many high-cost global miners which may be forced to cut production when prices dip steeply, MOIL can keep the show running.

Improving realisations

In the recent June quarter, the company managed to grow revenue by around 16 per cent over the same period last year, thanks to higher sales volumes due to liquidation of inventory.

This along with price hikes of between 5 per cent and 12.5 per cent during the quarter helped MOIL stem dip in profits during the June quarter to around 9 per cent, from the sharp declines seen in the earlier quarters.

But margins, though still healthy, remained under pressure. The company’s operating margin during the quarter was around 64 per cent and net margin just above 40 per cent. What’s encouraging though is that MOIL has taken another round of price hikes (up to 15 per cent) in July.

This suggests that the worst may be over for manganese prices. Also, MOIL which caters to the domestic market prices its output on the basis of import parity; so the weakness in the rupee has worked in its favour.

Expansion plans

Better prices and output growth are expected to help the company in the coming years.

MOIL plans to increase output from around 1.1 million tonnes a year currently to 1.5 million tonnes by 2016-17 and to around 2.2. million tonnes by 2020.

In this context, the grant of a prospecting licence in May 2012 for around 598 hectares in Maharashtra gives the company a shot-in-the-arm.

It has planned capital expenditure of around Rs 800 crore over the next three-four years to upgrade existing mines and increase output. Besides, capex of around Rs 150 crore will also be incurred on the joint ventures with SAIL and RINL to make value-added products.

The company also plans to initiate work soon on the new prospecting licence. In FY-13, the company has planned capital expenditure of around Rs 210 crore.

Tied to steel

Much of the manganese ore produced by MOIL is supplied to the steel sector in the country. As such, the company’s fortunes are tied to that of the steel sector.

The steel sector in India is currently passing through uncertain times due to weak economic growth and bottlenecks in the supply of inputs such as iron and coal.

But steel prices in the country have held up, thanks to the rupee’s depreciation. Also, the volumes of steel sales in India have not dipped, so far. MOIL expects demand for its products to sustain and even grow this year.

Over the long run, the steel sector in the country is expected to grow at a healthy pace with most majors expanding their capacities significantly. This should benefit MOIL with a growing market for its output.

Even now, demand for the company’s products runs ahead of supply, the shortage being made good through imports.

MOIL has also planned joint ventures with steel majors SAIL and RINL for production of alloys. But with the process yet to take off, tangible results from these ventures may be seen only far into the future.

MOIL has the advantage of not being affected by the allegations of irregular allotment of mines and mining bans — issues which have cast a shadow on the sector today. So, the company can continue with business as usual.

Risks

The passage of the mining bill, when it happens, will entail an outgo equal to royalty (around 4.2 per cent of sales) being paid by the company.

If the global slowdown intensifies, MOIL’s realisations could again be affected.

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