MOIL - BUY :: Business Line

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Investors with a long-term view can consider buying the shares of MOIL, India’s largest domestic producer of manganese ore. Last year, weak demand for steel had impacted global manganese ore prices and weighed on MOIL’s stock price. The stock fell from Rs 243 last year to Rs 213. However, easing global concerns and an expected improvement in local steel demand bode well for MOIL.

The company has large reserves of high-grade ore. Besides, its healthy cash holdings and robust profit margins provide strength. The stock is also attractively valued.

The current price discounts its trailing 12-month earnings by eight times, much lower than its historic average of 11 to 13 times. The stock price is also at a discount, compared with global peers such as BHP Billiton of Australia and Eramet of France.

LARGE RESERVES

MOIL has reserves of over 50 million tonnes (mt) of manganese ore spread across ten mines in Maharashtra and Madhya Pradesh. The bulk of the company’s ore is high grade manganese. Three mines — Balaghat, Dongri Buzurg and Ukwa — account for around 70 per cent of the company's reserves and an even higher portion of the company's higher quality ore. India is the world’s fifth largest producer of manganese ore and MOIL accounts for around half the domestic production.

This share was 42 per cent in FY12. The company operates open cast and underground mines.

Recently, MOIL received licence to prospect around 600 hectares (11 blocks) near its existing mines in Maharashtra. The company plans to open around four new mines in the newly allotted areas and expand its existing mines. After stable output of around 1 mt in the last few years, the company plans to double output from its mines to 2.2 mt over the next four years.

PRICE STABILITY

MOIL’s stock has been affected by the drop in international market prices. Average sale price per tonne fell from Rs 8,380 in June 2011 to Rs 6,852 in June 2012. The price has improved to an average Rs 8,600 per tonne this April, thanks to rupee weakness and global price improvement, which enabled the company to hike prices by nine per cent. Increase in the share of higher-grade ore also helped improve the average price.

MOIL fixes the price for its output on a quarterly basis based on global prices and demand-supply in India. For the current June-September quarter, prices are at the same levels as the previous quarter.

Around 90 per cent of manganese ore is utilised by local steel companies, with the rest used in the aluminium and chemical sectors.

Manganese ore demand in India is around three mt currently and is being met by imports. Indian steel consumption is estimated to grow around 6-7 per cent in the near future, compared with 2.5 per cent in 2012.

It takes around 32 kg of manganese to produce one tonne of steel and growth in steel production will increase the demand for manganese ore. This bodes well for MOIL, as it plans to double its annual output.

HIGH MARGINS

Last year, concerns on illegal mining by private companies raised the possibility of export ban on manganese ore. Even if there happens to be an export ban, MOIL’s production levels are unlikely to suffer as the company only sells locally and does not export its produce. The local demand will still exceed supply.

MOIL’s operating margins are high, at around 49 per cent, with a cost of extraction of around Rs 4,400 per tonne. Sales increased 8 per cent in FY13 to Rs 967 crore, from Rs 900 crore in FY12, after falling 20 per cent in FY12. Margins have dropped from a high of 67 per cent in FY11, due to increase in wage bill and fall in sale price. However, in the recent June quarter, margins increased to 49 per cent, up from 41 per cent in the previous quarter.

Margins are also helped by value-added products from its ferro-manganese and electrolytic manganese dioxide plants.

Additionally, the company sells power generated from its two wind power plants after meeting its own needs.

Thanks to zero-debt and no interest payments, the company’s net margins are also high. In the recent June quarter, net margin increased to 47 per cent, up from 41 per cent in the previous quarter.

For FY13, profits increased 5 per cent to Rs 432 crore, from Rs 411 crore in FY12, after falling 30 per cent in FY12. Any weakness in the rupee may have a net positive impact on the company’s margins, as its sales price is linked to the rupee.

FINANCIALS

The company had a large cash balance of Rs 2,277 crore as on March 2013. This works out to around Rs 135 per share. The company’s operations have been generating healthy cash flows, contributing to its financial muscle.

In FY13, cash flows from operations stood at Rs 343 crore. The company has been a regular dividend payer and dividend yield is around 2.5 per cent.