Stock Review: Manganese ore (MOIL)

In line with weak manganese ore prices, the shares of MOIL — India's largest manganese ore producer — have steadily declined since the start of 2011. In spite of healthy annual numbers announced by the company last week, the scrip touched its all-time low of . 349 on BSE on Wednesday.

Given the weak near-term outlook in the steel as well as manganese industries, MOIL's shares are not expected to witness any great activity in the immediate future.

Manganese ore is a key ingredient in steel-making process, which alone represents about 95% of its total consumption. Naturally, manganese ore price movements are correlated to steel price movements. Currently, global manganese ore prices are trading at about 20% lower than they were a year ago. This applies to MOIL as well, which sets prices on a quarterly basis.

The global mining major BHP took a 12% price cut in May, while a number of Chinese ferro manganese smelters are shut due to weak demand. This is set to put pressure on MOIL's realisations in the coming quarter as well. Still, the management's view that the prices have bottomed out is a positive indicator. Even though the sales growth may be muted, the country's largest manganese producer can be expected to maintain its operating profit margin between 60% and 70% on an annual basis. During the year ended March 2011, MOIL's operating profit rose 27% to . 767.2 crore, which implied a 500 basis points rise in its margin to 67%. This came on the back of an 18% rise in annual sales to . 1,139.97 crore. Net profit was up 26% to . 588.1 crore, which translates to an equal rise in earnings per share to . 35. As on March 2011, the company's net cash stood at . 1,879.7 crore.

With about 17% of the country's total reserves, MOIL accounts for about half of the country's manganese ore production and is well placed to capture the 10% expected growth in the Indian steel industry. In an environment of lower prices, the company says it will increase volumes in order to maintain 15-20% annual sales growth. At . 349, the stock trades at a price earnings ratio of 9.5.