Stock Reivew: MOIL

As expected, MOIL's first quarter results were negatively impacted by the weakening trend in manganese ore prices. But even as the price of the steel-making ingredient may have reached rock bottom levels, given the underlying trends in the global industry, it will be a while before prices recover enough to benefit MOIL's earnings.

Owing to the high demand of manganese ore in 2007-08, several miners expanded capacities exponentially creating a surplus. Currently, the total global requirement for manganese ore is 35 million tonne, whereas production is 47 million tonne — resulting in an excess of 12 million tonne. Moreover, the production of steel, the main user industry for manganese, has increased by 15% while manganese ore production is up 33%. This has created a double whammy negative impact on manganese ore prices, the effect of which is not likely to subside anytime soon.

But one can take solace in the fact that prices are not likely to go beyond current levels, as it would become unviable for companies to operate, affirmed the management of MOIL. MOIL is currently the world's lowest cost producer of manganese ore. It has zero debt on its books and cash balance of . 2,000 crore as on June 30, 2011.

During the April-June 2011 quarter, the company's revenue was . 210.08 crore, 40% less than what it reported a year ago, on account of degrowth in volumes and lower prices. Volumes declined by about 18% to 221,000 tonne as several buyers found it cheaper to import the ore rather than buy it domestically as the import duty on manganese ore is a mere 2%. Despite lower costs, the fall in sales resulted in a decline in operating profit to 126.67 crore, half of what it was in the year-ago period. Consequently, earnings per share (EPS) was reduced by 40% to 6.5.

The stock trades at 310, which is 10 times its trailing 12 months EPS. Unfavourable market conditions have wiped out almost half of the company's market capitalisation since it listed on the bourses in December 2010. The share price of MOIL has moved in tandem with the price of the ore. Given that manganese ore prices are not likely to fall further from here, one could assume that the share price of MOIL has also bottomed out as the fundamentals of the company remain in tact.