Price band Rs340-375
 

MOIL has over four decades of experience in manganese ore mining operations. It enjoys a near monopoly with a dominant 50% share in the domestic manganese production and is also one of the lowest cost producers of manganese ore in the world. MOIL was conferred with ‘Mini Ratna’ status by Government of India in FY08. A debt-free company, it has a healthy balance sheet with strong cash flows. As on H1 FY11, its cash balance stood at Rs17.6bn, which translates into Rs105 per share. It has witnessed revenue and PAT CAGR of 31% and 42% respectively, over the last four years. Presently, it is enjoying OPM of 70.3% and PAT margin of 52.1%. We recommend investors to ‘SUBSCRIBE’ the issue.

Domestic manganese ore industry to touch 4.1mn tpa

Rising ferro alloys production by steel manufacturers has been driving robust demand for manganese ore. Slower paced growth in development of mines has resulted in India being a net importer of manganese ore for the last three years. Domestic manganese ore demand is expected to witness a 9% CAGR and touch 4.1mn tpa by FY12E.

Largest producer of manganese ore; high quality reserve base

MOIL operates seven underground and three opencast mines located in strategic states like Maharashtra and Madhya Pradesh having access to 21.7mn tons of proved and probable reserves as on October 1 ’10.  In total, it has 69.5mn tons of measured, indicated and inferred reserves of manganese ore. Around 55% of its proved and probable manganese ore reserves have average manganese content of 40% or higher and 27.5% reserves contain 36-39.9% manganese content. By virtue of producing 1.09mn tons in FY10, it is the largest producer of manganese in India with a total domestic production share of 50%. It is also one of the lowest cost producers of manganese ore at US$17/ton as compared to a high of US$278 per ton incurred by Eurasian Natural Resources Corporation globally (CARE Research).

Recommend ‘Subscribe’

At the upper end of the price band of Rs340-Rs375, MOIL would trade at P/E of 9.5x and EV/EBITDA of 5x based on H1 FY11 annualized financials. Given the robust demand outlook for manganese ore and company-specific positives, a) largest and lowest cost producer of manganese ore in India with 50% share b) strong balance sheet (debt free) and c) robust cash flows, we recommend ‘Subscribe’ to the issue.

Company Background

Incorporated in 1962, MOIL is a wholly Government of India owned company which is engaged in mining operations of manganese ore for over four decades. It has been conferred with ‘Mini Ratna’ status as well. Currently, MOIL operates ten mines, out of which, six mines are located in Nagpur, Bhandara districts in Maharashtra. The other four mines are located in the Balaghat district of Madhya Pradesh. Seven mines are underground located at Kandri, Munsar, Beldongri, Gumgaon, Chikla, Balaghat and Ukwa and three mines are open cast located at Dongri Buzurg, Sitapatore/Sukli, Tirodi. It sells manganese ore to ferro alloy producers in the Indian market. Key clientele include state entities like Maharashtra Elektrosmelt Ltd and Bhilai Steel Plant, which are subsidiaries of SAIL (Steel Authority of India Ltd.), accounting for 22.1% of revenues in FY10. MOIL also diversified into renewable energy and is the first PSU in India to set up wind farm of 20MW capacity in the Nagda/Ratedi Hills in Madhya Pradesh.

About the issue

The issue comprises sale of 33.6mn shares by the promoters, Government of India (16.8mn), State Government of Madhya Pradesh (8.4mn) and State Government of Maharashtra (8.4mn). The offer constitutes 20% of the paid-up equity capital of MOIL. Being a divestment by the promoters, the company would not receive any proceeds from the issue.

Future plans

• MOIL has planned a capex of Rs840mn for FY11 and Rs1.08bn for FY12 towards development of its existing mines. It has already spent Rs242mn in H1 FY11.

• MOIL has proposed to produce 51,000tpa of Ferro Manganese through a JV with SAIL at Chhattisgarh. In addition to this, it has signed an agreement with RINL (Rashtriya Ispat Nigam Ltd.) to produce 112,500tpa of Silico Manganese at Andhra Pradesh.
  
  

• The company is also looking to acquire mining properties in South Africa, Congo and Turkey, as the demand for manganese by Indian steel producers is expected to rise in the near future.

Industry overview

• Manganese ore is the fourth most utilized metal in the world after iron, copper and aluminum. Its application is primarily used in production of ferro alloys, dry cell batteries, deoxidant for copper alloys to improve strength and castability and used in treatment of waste water and purifying drinking water.
  
  

• Demand for manganese ore is directly dependent on steel production. Each ton of steel produced translates into ~30kg of manganese ore requirement.
  
  

• Over 90% of the world’s production of manganese is used for desulphurization and strengthening of steel. Domestic steel demand is expected to witness a CAGR of 9.2% from 59.4mn tons in FY10 to touch ~92mn tons by FY15E.
  
  

• Globally, India accounts for 3% of 3,200 tons land-based manganese ore. Domestic demand for manganese ore is expected to clock a CAGR of 9% to touch 4.1mtpa by FY12E (Source: CARE Research).

Concerns

• Any change in pricing regulations, delays in obtaining clearances, and regulatory approvals may affect company’s operations