MOIL -- Lower than expected volumes hurt 1QFY12 earnings ::JPMorgan,

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MOIL Ltd Overweight
MOIL.BO, MOIL IN
Lower than expected volumes hurt 1QFY12 earnings


 Weak volume trends clouds the quarter: MOIL reported 1QFY12
EBITDA of Rs1.3bn (-21% q/q) and PAT of Rs1.1bn (-18% q/q), below
JPMe at Rs1.4bn and 1.2bn respectively. While the weak pricing trend
was expected (Mn ore ASP declined ~10%) post the two price cuts in
1Q (in Apr-11 and then again in mid-May-11), lower offtakes by the
customers hurt volumes in the quarter. Mn ore sales volume during the
quarter were at ~220kt (-15% q/q; -19% y/y) vs. JPMe at 245kt. While
the company had highlighted weak volume trends in the 4QFY11
conference call (driven by lower priced imports in the first half of the
quarter, leading to the price cut in May), the delivery of lower priced
import orders placed in 4QFY11 and tepid demand trends among ferroalloy
and steel mills may have impacted offtakes during the quarter.
 Subdued volume trend to continue into 2QFY12: While management
has indicated to soft trends continuing into the current quarter, we do not
expect any large recovery in volumes in the 2QFY12 given continued
weakness in the end demand for steel. The management does not expect
any impact on its volumes from the recent disruption in steel production
due to the ban on iron ore mining in Bellary among its large customers.
MOIL has targeted production of 1.2MT in FY12E and had inventory of
over 100kt at the end of FY11.
 Price decline offset by better mix: Despite the sharp price cut in the
1QFY12 (blended price for ferro-grade Mn ore available with MOIL was
cut by 12% in the beginning of the quarter and by another 18% on 23-
May-11), realization in the quarter declined ~10% q/q. We believe that
improving product mix shift towards higher priced ore grades helped
partially offset the sharp base price decline. The blended prices for
2QFY12 were lowered by ~5% as mix shift continues to offset base price
cuts. As per the data on available quantity published with the 2QFY12
pricing, proportion of higher priced ferro-grade ore (price Rs7,000-
12,000) increased from 28% in 3QFY11 to 42%. Lower-margin fines
(prices Rs2,200-3,800) saw share decline to 14% for 2QFY12 from
around 43% in 3QFY11. As per news reports (steelguru), global Mn
ore prices have been stable over the last few months (Aug was the
fourth consecutive month of flat prices after a very weak 1HCY11),
which points to Mn ore prices bottoming out at current levels.
Domestic prices currently at par with the import prices for Mn ore.