The global commodity market meltdown offers long-term investors some unique opportunities. One such avenue is State-owned mining companies; many of which have strong balance sheets with large cash piles, even as private miners are reeling under debt. While global commodity prices may not recover in a hurry, Indian producers may be better sheltered as local demand revives.
Among PSU miners, a company with strong fundamentals is MOIL — the largest domestic producer of manganese ore, which is a key raw material for steel production. The company has large reserves, of over 73.5 million tonnes unit (mtu) — over 40 per cent of the country’s reserves — spread across 10 mines. It produces over 50 per cent of the country’s manganese ore and is the only high-grade ore producer in India.
MOIL bore the brunt last year when demand slowed and prices fell by over 60 per cent. In 2015-16, sales slipped 24 per cent to ₹628 crore due to sustained price pressure. Operating margin slid to a mere 11 per cent in 2015-16 from enviable levels of about 50 per cent in the past. Net profit fell to ₹173 crore from ₹428 crore in 2014-15.
As the result of lower earnings, the stock’s valuation has turned expensive. The current price of ₹233 discounts MOIL’s trailing 12-month earnings by 22 times, double its three-year historical average of about 10 times. But things are turning around for the company and valuation should moderate with earnings growth. Manganese ore prices seem to have bottomed out and have increased in 2016. Local demand is picking up and the company is actively working on expansions to double output by 2020-21, supported byits sizeable cash reserves of ₹2,910 crore (₹170 per share). These factors will aid revenue and profit growth in the next two years.
Investors can buy the stock, given its strong fundamentals, improving revenue and profit outlook. MOIL’s leadership position, robust outlook for steel demand and strong ore reserves make it a good pick for the long haul.
Growing salesEven amidst the global commodity slowdown, MOIL’s sales volumes improved. Demand for manganese ore was sluggish in the first nine months of 2015-16 but in the fourth quarter, sales nearly doubled year-on-year to 0.38 mtu. The company has signed sales contracts for 0.39 mtu for the first quarter of 2016-17.
Bulk of the ore demand is from the local steel industry. Indian steel production increased 2.6 per cent year-on-year in 2015 and is expected to increase at a brisk pace. The Indian Bureau of Mines projects local manganese ore production in 2020-21 at about 5 mt (2.5 mt currently) to meet demand. MOIL, being the leader in the segment, will benefit from this growth.
Expansions are underway to double output to 2 mt by 2020-21. It received clearance for its ₹800-crore expansion plan in Balaghat, Madhya Pradesh, in March 2016. The mine depth will be increased and production is expected to double to 0.65 mt by 2025. The company has also secured 800 hectares of new leases in Maharashtra.
In the March 2016 quarter, revenue increased 30 per cent year-on-year to ₹209 crore, in spite of nearly 60 per cent fall in ore prices. This was thanks to increased sales volume and larger share of higher-grade ore that helped realisation.
Besides ore, MOIL produces value-added products such as ferromanganese and electrolytic manganese dioxide. It has also entered into a joint venture with Steel Authority of India and Rashtriya Ispat Nigam to produce alloys. These should further aid revenue and profit.
Profit to improveThe company’s profit took a hit in 2015-16 due to lower realisation and reduction in interest income on its large cash hoard as rates fell. There was also higher provisioning for retirement benefits, royalty and district mineral foundation payments and stock write-off.
Profit should get a boost as global ore prices continue to revive. The prices, which touched a low of about $1,500 per tonne in 2015, has recovered to $2,000 a tonne currently. MOIL raised the sale price for various ore grades in the recent April-June quarter by up to 50 per cent; sustained price improvement along with increasing sales volumes should aid profit.
MOIL has been working on reducing power costs through captive wind and solar power plants. Its current dividend yield is about 2.3 per cent.