IPO Review: Manganese Ore India Limited (MOIL)

With good cash reserves and zero debt on its books, MOIL's stock looks to be a good long term bet. Investors can subscribe to the issue

 

IPO details:
Company Name: MOIL Issue Size: 1,142-1,260 crore
Price Band: 340-375
Issue Date: Nov 26 to Dec 1, 2010


STATE-OWNED MOIL is hitting the capital market with an initial public offering of 3.36 crore equity shares in the price band of 340-375 (with 5% discount for retail investors and employees). The sale of shares is aimed at divesting 10% of the central government's stake and 5% each of Maharastra and Madhya Pradesh governments. The company will not receive any proceeds from the issue.

 
   At the upper end of the offer price, the price-to-earnings ratio of the company works out to be 9.5 based on FY11 annualised EPS. There is no direct competitor for MOIL in the domestic the local market; the broad peer group could include NMDC, Sandur Manganese and Sesa Goa. These companies trade at a premium to MOIL, despite the fact that the latter has the highest operating margin among them. In terms of its global peers BHP Billiton and Eramet, which have operating margins far lower than MOIL, are trading at a price multiple of 12-17. The company is one of the low-cost producers of manganese ore with an average cost of production around $71/tonne compared with around $260/tonne for BHP Billiton. MOIL should get premium over most of these domestic and global players because of its scale of production, lowcost high margin structure and no debt on its books.

BUSINESS AND FINANCIALS


Incorporated in 1896, MOIL is the largest manganese ore producer in India and the fifth-largest in the world. The company's product portfolio consists of manganese ore (1.1. mtpa capacity), high carbon ferro manganese, electro manganese di-oxide and wind power. MOIL currently operates seven underground mines and three open cast mines across Maharastra and Madhya Pradesh, having access to 21.7 million tonnes of proved and probable reserve as on October 1, 2010. In total, it has around 70 million tonne of measured, indicated and inferred reserves of manganese ore. At Balaghat and Dongri Buzrg mines, MOIL has the beneficiation plant to upgrade the quality of the manganese produced. The top 10 customers of the company accounted for about 51% of the sales with SAIL accounting for 22% of the total manganese ore sales.

   MOIL, for the past four years, witnessed revenue and PAT CAGR growth of 31% and 42%, respectively. It has posted a 70% EBITDA margin during the first half of FY11 after witnessing a dip in FY10 due to sudden drop in prices. The company has been profit making and dividend paying for the past 17 years. It has no debt on its book and has cash balance of 1,760 crore that translates in to 105 per share. This high level of cash reserve can help the company acquire mining assets in India and abroad.

FUTURE OUTLOOK

MOIL has 55% of its current manganese ore with manganese content more than 40% or higher. Further the company does not have any reserve below 30% of manganese content. It will continue to charge premium for its ore compared to its peers as higher percentage of manganese per tonne boost the prices. The company produced 1.1 million tonne of manganese in FY10 and plans to increase its production to 1.5 million tonne by FY16 with the total capex of 768 crore. It translates into a CAGR production growth of 5.5% during the period.

   For expanding its mining capacity, MOIL has planned a capex of 84 crore for FY11 and Rs108 crore for FY12 for developing its existing mines. The company is also increasing its value-added production capacity and has entered into a joint venture with SAIL and RINL for ferro plants in Chhattisgarh and Andhra Pradesh. This increased value-added production will help the company diverse its product portfolio.

   MOIL, unlike other mining PSUs, prices its ore in accordance with international prices and domestic demand. These prices are revised every three months. This autonomy gives the company a good opportunity to leverage increasing manganese demand in the country. According to CARE Research, the demand for manganese is expected to rise at a CAGR of 9% to 4.1 million tonne by FY12. This should benefit MOIL, given its dominant market share in the domestic market.

RECOMMENDATION

The stock is a good long-term bet with low risk to its profitability and steady cash flows. Apart from that, the company has a business with low commercial risk and is poised to deliver growth in tandem with growing demand from the steel sector. MOIL may also turn out to be a high dividend paying stock as it has good cash reserves and zero debt on its books. At the given valuations, it seems that the government has left a lot on the table for investors.