MOIL is India’s largest manganese ore producer and is amongst the top 10 global producers, accounting for 42% of India’s production and 30% of proven reserves. The company has high quality (36-39% Mn) manganese reserves of 73.5mn tons and 22.05mn tons of proven and probable reserves. MOIL’s underperformance over the last two years has largely been due to depressed manganese ore prices and the company’s inability to raise production. Manganese ore production over the last two years has been stagnant as the company was unable to speed up its capex plans. However, with the completion of the drilling at Gumgaon and Balaghat, we expect production to increase marginally over the next three years.
Manganese ore prices formed a bottom in FY12 and have been inching upwards over the last six months led by a decline in Chinese inventory and steady demand from India and China. The strong recovery in prices have been driven by China and India and we believe prices would continue to trend upwards as global steel production is expected to rise gradually over the next two years. A depreciating rupee would also aid MOIL to increase the price of manganese ore by 5-7% in the next quarter. We estimate MOIL’s average realizations to increase by 3% each over the next two years.
On the back of a revival in steel industry, better volumes and marginal uptick in realizations, we estimate earnings CAGR of 8.9% over FY12-15. At the end of H1 FY13, the company had cash reserves of Rs22.3bn, accounting for 51.8% of current market cap. We expect the company’s cash reserves to increase to Rs23.5bn in FY13 and to Rs26.2bn in FY14 (62% of current Mcap) as we do not expect the company to incur any major capex. MOIL is currently trading at 3.2x FY14E EV/EBIDTA, which is at a huge discount to its historical average of 5.9x and also to its international peers. We value the company at 4.5x FY14E EV/EBIDTA and arrive at a 9-month price target of Rs288. We initiate a BUY recommendation on MOIL with a 15.6% upside from current levels.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|yoy growth (%)||(21.1)||4.8||3.7||4.4|
|yoy growth (%)||4,108||4,544||4,940||5,272|
|Cash per share (Rs)||124.3||140.2||155.7||177.9|
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