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MOIL – Offer for sale
Angel Broking recommends a Subscribe on MOIL
MOIL, a Miniratna PSU, accounts for nearly 50% of India’s manganese ore
production. We recommend Subscribe and Initiate Coverage on the stock with a
Target Price of `461, valuing it at 5x FY2012E EV/EBITDA, as MOIL sells high-tomedium
grade manganese ore at market-linked prices, expanding its production
capacity at existing mines and is attractively valued as compared to peers.
Is MOIL better placed than CIL and NMDC: Our analysis of the three companies
on eight different factors, classified under the parameters of industry, business
and valuation, clearly indicates that MOIL is better placed to NMDC due to its
attractive valuations. However, when compared to CIL, MOIL stands lower as its
fortunes are closely linked to steel industry (cyclical) and its earnings are subject to
high risk, if the proposed 26% mining tax is implemented, although debatable.
Leader in the Indian manganese ore market: MOIL is expected to maintain its
market share as it augments its production capacity at existing mines to 1.5mn
tonnes by FY2016E (1.1mn tonnes in FY2010). In the long term, MOIL is
expanding its value-added capacity through its 50:50 JVs with SAIL (1,06,000
tonnes) and RINL (57,500 tonnes).
Sharper earnings trajectory: In the near term, we expect flattish volume growth as
benefits of expanded capacity will accrue stream post FY2012E. However, higher
manganese ore prices and stable costs with the next revision of the wage
agreement due in 2017E is expected to result in EBITDA margin expanding by
946bp to 71.6% in FY2012E and a 32.3% CAGR in EBITDA over FY2010–12E.
IPO priced attractively: At the issue price, MOIL looks attractive as compared to
Citic Dameng Holdings (Citic), a leading manganese ore producer of China that
was listed on the Hong Kong exchange on November 18, 2010. Citic is currently
trading significantly higher at 20.6x CY2010E EV/EBITDA, whereas MOIL trades
at 4.2x FY2011E EV/EBITDA.
Key risks: 1) A decline in manganese ore prices, 2) limited mine life for few mines,
3) downturn in the steel cycle and 4) implementation of the proposed mining tax.
Is MOIL better placed than CIL and NMDC
The recent spates of public offerings from resource-based companies such as CIL
and NMDC have seen a mixed response from investors. While CIL was
oversubscribed 15x because of its strong business model and attractive valuations,
NMDC, despite being a fundamentally sound company, was overlooked by
investors due to its unreasonably high valuation as compared to peers.
We analysed MOIL and the recently listed mining companies on eight different
factors categorised under the parameters of industry (market share, end-user
dependency and mining tax, business (mine life, risk to volume growth, pricing
control and staff cost) and valuation (stock performance).
On the industry front, we believe CIL is better placed as compared to MOIL
and NMDC, as it is dependent on the power sector, which is relatively stable
as compared to the steel sector. Further, the much talked 26% mining tax will
hurt CIL the least as it already spends 5% of its last year’s retained earnings on
corporate social responsibility (CSR).
On the business front, MOIL is better placed than CIL on account of lower risk
associated with its volume growth as its mines are located in the state of
Maharashtra and MP, which have a relatively well developed infrastructure.
Also, absence of government intervention in regulating manganese ore prices
has given MOIL the leeway to sell its product at market-driven prices, thus
maximising value for its shareholders. While NMDC scores over MOIL on staff
cost and mine life factors, MOIL is relatively better placed on risk to volume
growth and pricing control parameters.
On the valuation parameter, NMDC disappointed as the FPO pricing was
expensive compared to peers. Currently, NMDC trades 23.9% lower than its
issue price, while CIL is trading at 28.2% above the issue price. Based on the
fair value of `461, we expect MOIL to generate returns of 22.9% for investors.
While CIL scores over NMDC and MOIL on the industry and valuation fronts,
MOIL and NMDC are relatively better placed than CIL on the business front.
The IPO of MOIL is attractive as compared to NMDC’s IPO, mainly on account of
its attractive valuations.
Outlook and valuation
MOIL, a Miniratna PSU, accounts for nearly 50% of India’s manganese ore
production. We recommend Subscribe and Initiate Coverage on the stock with a
Target Price of `461, valuing it at 5x FY2012E EV/EBITDA, as MOIL sells high-tomedium
grade manganese ore at market-linked prices, expanding its production
capacity at existing mines and is attractively valued as compared to peers.
MOIL IPO priced attractively
We compare the valuations of MOIL with Citic – a direct peer, and with recently
listed mining companies in India and diversified global mining companies – indirect
players.
Citic, China’s largest manganese was listed on the Hong Kong exchange on
November 18, 2010, to raise HK $2.06bn (US $266mn). The company operates
in China and Gabon. In 2009, the company produced 1.1mn tonnes of
manganese ore. Citic has a resource base of 97.2mn tonnes. The company is
currently trading at HK $2.84, which is 5.2% higher than its issue price.
In comparison to the recent listing in the Indian mining space, MOIL trades at 4.2x
and 3.6x FY2011E and FY2012E EV/EBITDA, while CIL and NMDC are trading in
the range of 6–13x EV/EBITDA. Further, MOIL is priced at a discount of ~30% as
compared to global diversified miner
Offer for sale details
The offer for sale entails issue of 3.36cr equity shares priced in the band of
`340–375. The issue of 3.36cr equity shares by the central and state governments
represents 20% of the company’s total outstanding share capital. While the central
government owns 81.6% stake, state governments of Maharashtra and Madhya
Pradesh own 9.6% and 8.8%, respectively. Retail investors and employees are
entitled to a 5% discount to the issue price. Post the issue, the government holding
will be 80% of the total share capital. The company will not receive the offer
proceeds, as the proceeds are part of the government's divestment plan.
Key risks
MOIL’s business is directly correlated to the steel industry
The manganese ore industry is highly dependent on the prospects of the steel
industry, as 94% of manganese ore produced is used in the production of ferro
alloys, which is consumed in the steel industry (90% of ferro alloy produced is used
in the steel industry). Manganese ore prices have been very volatile historically and
had fallen by more than 50% during the downturn in 2008. Any adverse changes
in steel demand can have a negative bearing on manganese ore prices.
Implementation of new mining policy to include 26% profit
sharing
To curb illegal mining and fast-track approvals for mining rights, the government
has proposed a new bill that requires miners to share 26% of profits with local
people affected by their mining projects. Recently, the bill has received an
in-principle approval from the Group of Ministers (GoM) and the proposed bill is
expected to be placed in the parliament for approval during the upcoming winter
session.
Although the proposed bill lacks clarity, we feel the implications of the new profitsharing
rule on MOIL’s earnings could be severe as the company spends only
0.5–2% of its retained profits on CSR activities.
Limited mine life for some of the operating mines
The reserves at Kandri, Beldongri, Chikla and Tirodi are expected to exhaust in the
next 6–9 years based on FY2010 production levels. These mines produced 32.5%
of the total manganese ore in FY2010. Thus, in the absence of any significant
reserves accretion at the existing or new mines, the company’s performance could
be affected in the long term.
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