MOIL - Pricing pressure to keep performance muted - Visit Note - SPA Sec

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MOIL is a dominant and purely a manganese player in India. Over the past couple of quarters, realizations have come down by 35%. The company is looking to overcome the tide by improving production and targeting a volume growth of 30% in the current fiscal. We met the management of the company and following are the key takeaways.

Realizations continue to be under pressure

In 2010, global steel production increased by 16.7% however during the same period manganese production grew at a faster rate of 33.3% leading to a surplus situation in the international markets. International manganese prices have corrected by 37.4%, to USD 5.4/dmtu. As a result, average NSR/t for MOIL has come down from INR 9,376 in 4QFY11 to INR ~7,600 in 1QFY12, down by 35% YoY.

Pushing volumes to make up for low realizations

In order to make up for lower NSRs, MOIL is aiming to increase its turnover by 30% in FY12 to 1,300,000t by increasing production from existing mines to 1,150,000t and liquidating 180,000t of inventory (as of FY11 end). The management is aiming to achieve this growth through import substitutes.

Margins sensitive to NSRs

MOIL is one of the lowest cost producers of manganese producers in the world with an average cost/t of INR 2,800. Employee costs account for 45-50% of the total costs with next wage revision due in 2017. Employee costs and other direct expenses are expected to remain stable over the coming years, making the operating margins a direct function of realizations. With the international prices under pressure we expect EBITDA margins to remain in the range of 60.0% vis-à-vis 67.3% in FY11.

Expansion plans

The capex to enhance the production in the Gumgaon and Balaghat mine is expected to be completed by October and December 2011 respectively. This is will increase the ROM production from 60,000tpa to 100,000tpa.

Maharashtra government has reserved 814.7ha of land for MOIL and the company has applied for a prospecting license for the same. Post the acquisition of PL, the production is expected to commence in 2013.

Updates on the joint venture plans

MOIL has entered into joint ventures (50:50) with SAIL and RINL to integrate forward and setup ferro manganese and silico manganese plants. In these projects, the JV parties will setup ferro manganese plants of 51,000tpa and silico manganese plants of 112,500tpa at a total outlay of INR 5,981.9mn. These projects are expected to come on stream by 2HFY13.

Mining Bill – further clarity needed

As per the draft MMDR bill passed by the GoM, non-coal producers need to share 100% of the royalty with the people affected at the project site. MOIL currently pays 4.2% of royalty which will be increased to 8.4% if the MMDR Bill is passed and becomes an act. However, the management awaits further clarity on various issues mentioned in the bill.