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MOIL LTD. |
Attractive valuation; ‘SUBSCRIBE’ |
SUBSCRIBE
n MOIL is the largest manganese ore producer in India, contributing 50% of the total domestic production. Globally it ranks fifth among all the manganese producers
n The company is among the lowest cost manganese ore producers with an EBITDA margin of ~70% during H1FY11. It has ~22 mt of good quality manganese ore reserves
n MOIL is a debt free company with net cash of Rs 105 per share during H1FY11. The company has a planned capex of Rs 7680 million to ramp up its capacity to 1.5 mtpa by FY16
n At the upper band of Rs 375, the stock looks attractively valued with potential upside of 40% on 6x FY12E EV/ EBITDA basis - Recommend SUBSCRIBE
Issue Details | ||
Date | 26-Nov — 01-Dec | |
Price Band (Rs) | 340- 375 | |
Offer size (Rs) | 12,380 mn | |
Offer size (shares) | 33.6 mn | |
Post issue (shares) | 168.0 mn | |
M.Cap (Rs) | 61,900 mn | |
Company description
MOIL Ltd is the largest manganese ore producing company in India and ranks fifth in
the world. In 1896, a British company by the name of Central Provinces Prospecting
Syndicate was set up. In 1924, it changed its name to the Central Provinces Manganese
Ore Company Limited (CPMO). Pursuant to an agreement between the Government of
India (GoI) and CPMO, a company in the name of Manganese Ore (India) Ltd was
incorporated on June 22, 1962, with 51% capital held between the GoI and the State
Governments of Maharashtra and Madhya Pradesh and the balance 49% by CPMO.
CPMO sold all its shareholding and certain other properties and assets to GoI in 1977
and subsequently, GoI transferred all its assets to the company and it became a 100%
Government Company under the administrative control of the Ministry of Steel. Finally in
August 17, 2010 the name of the company was changed to MOIL limited. The product
portfolio of MOIL consists of manganese ore (1.1 mtpa capcity), high carbon ferro
manganese (HCFM, 10000 tpa capacity), electrolytic manganese di- oxide (EMD, 1000
tpa capacity) and wind power (20 MW capacity).
Valuation: At the higher band of Rs 375/ share the stock discounts its FY12E earnings
by 8x and EV/ EBITDA by 3.5x. Considering its dominance in business with virtually no
competitor and strong growth prospect of domestic steel industry, our fair value for the
stock comes at Rs 526/ share by giving a multiple of 6x to its FY12E EV/ EBITDA, which
suggests a gain of 40% on the upper band of the offer price. We recommend
SUBSCRIBE to the issue.
Manganese ore resources and reserves of MOIL
MOIL currently operates seven underground mines (Kandri, Munsar, Beldongri, Gumgaon,
Chikla, Balaghat and Ukwa mines) and three opencast mines (Dongri Buzurg, Sitapatore/
Sukli, and Tirodi) located in the states of Maharashtra and Madhya Pradesh.As per the
latest JORC report prepared by IMC MOIL has 21.7 million tonnes of proved and probable
reserves and a total of 69.5 million tonnes of measured, indicated and inferred mineral
resources of manganese ore. An area of approximately 814.71 hectares in the State of
Maharashtra has been allocated to MOIL by the Ministry of Mines in October 2009. The
company has applied for a prospecting license for that. Among the total current manganese
ore reserves, 55.0% have an average manganese content of 40.0% or higher, 27.5% of
manganese ore reserves have an average manganese content ranging from 36.0% to
39.9%.
Production of manganese ore by MOIL
MOIL has produced ~1.09 mt of manganese ore in FY10 and during H1FY11 it has
produced 0.52 mt indicating an improvement on YoY. We have assumed 5% YoY volume
growth on an average basis till FY13E. Production from underground mines constitutes
~65% of the total production with Balaghat mine being the largest contributor.
Sales mix
MOIL sales portfolio consists of five products viz. manganese ore, HCFM, EMD, ferro
manganese slags and wind power. Among these, manganese ore alone constitutes more
than 90% of the total sales after meting captive requirement to produce HCFM and EMD. In
case of wind power, about 30% of the total unit generation is consumed internally and rest
is sold to the Madhya Pradesh Energy Development Corporation Ltd (MPEDCL).
Strong EBITDA margins helping robust earnings
MOIL has been one of the lowest cost producers of manganese ore in the world. Along with
this, better price realizations in India have been keeping well with the company as far as its
margins are concerned. MOIL has posted ~70% EBITDA margin during H1FY11 after
witnessing a dip in FY10 due to sudden fall in prices. We believe the company would
maintain strong margins going forward also
Key strengths of the company
Largest producer of manganese ore in India
n MOIL accounts for about 50% of the total manganese ore production in India as per the
Indian Bureau of Mines Indian mineral Yearbook, 2008. The company has virtually no
competitor in India
n With strong growth prospect of Indian steel industry, demand for manganese ore also is
likely to remain robust, as manganese ore is primarily used to make ferro alloys for steel
production. MOIL remains well placed to cater to this demand
n The company is in the process of expanding its capacity from 1.1 mtpa to 1.5 mtpa by
FY16 with a total planned capex of Rs 7680 milion. In connection with these expansion
projects, MOIL has committed capex of Rs 839.8 million and Rs 1,077.1 million
respectively for FY11 for FY12. The company has already spent Rs 241.8 million as of
October 31, 2010.
Good quality of reserves
n Out of MOIL’s total current manganese ore reserves, 55.0% have an average
manganese content of 40.0% or higher, 27.5% of manganese ore reserves have an
average manganese content ranging from 36.0% to 39.9%. Further the company does
not have any reserve below 30% manganese content
Low cost – high margin structure
n As mentioned earlier, MOIL is one of the lowest cost producers of manganese ore in the
world with average cost of production being ~US$71/ tonne compared to US$260/ tonne
for BHP Billiton
n Backed by lower costs, MOIL enjoys one of the best margins in the business among all
the players
Strategic location
n All the mines of MOIL are located in states of Maharashtra and Madhya Pradesh i.e.
Central India. Due to this the transportation of the material becomes more feasible giving
an edge over its competitors who are primarily located in Eastern India
Debt free company
n MOIL is a debt free company with cash reserves of ~Rs 1760 crore in H1FY11 or ~Rs
105/ share. This makes the company well positioned for any expansionary activities or
acquisition of mines (in India or abroad) whenever such opportunity comes
Key concerns
Fluctuation in manganese ore prices
n Price of manganese ore have been volatile and any sharp fall in prices would put
pressure on the margins and on the overall performance of the company, as in the
coming 2-3 years there would not be any significant volume growth
Delay in reserve accretion
n MOILs mines are century old. Dip digging may start increasing costs. Also delay in
getting new mines and slow addition to the reserve would raise concerns, as the
company has only 10 years of reserve as per the current production levels
Valuation attractive: providing upside of 40%
At the higher band of Rs 450/ share the stock discounts its FY12E earnings by 8x and EV/
EBITDA by 3.5x. This suggests that the stock is quite attractively and provides room for
substantial upside. There is no exact comparable peer of this company, as all other
producers of manganese ore are diversified in nature in terms of their product portfolio.We
have gone through valuation of some of these companies including Sesa Goa from India
(though it does not produce manganese ore). We feel MOIL should get a premium over
most of these players because of its scale of production with virtually no competitor, low
cost- high margin structure and no debt on book. Considering these along with the strong
growth prospect of domestic steel industry, our fair value for the stock comes at Rs 526/
share by giving a multiple of 6x to its FY12E EV/ EBITDA, which suggests a gain of 40% on
the upper band of the offer price. Recommend SUBSCRIBE
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