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Mining For Profits - MOIL India

The Government of India seems to be cruising in terms of its aim to raise Rs 40,000 crore through divestment this fiscal. While Coal India’s initial public offering (IPO) has got successfully listed, even the follow-on public offer for Power Grid Corporation of India got oversubscribed significantly. Next in line is a Mini Ratna company, Manganese Ore India (MOIL India). The recent IPO of Coal India was missed by many and given the kind of fantastic listing it has provided those who did not invest must be cursing themselves and are looking at a chance to offset the notional losses by investing in other PSU offerings. It is true that MOIL is India’s largest manganese ore producer by volume and investors are eagerly waiting for its IPO. But after the listing of Coal India a few factors have changed and the market has witnessed some amount of uncertainty. So the moot question is whether to invest in the MOIL IPO or to avoid it? Going ahead we have discussed the same in detail. But first let’s get updated about the IPO.

As mentioned earlier, the main objective of the offer is to carry out the divestment of 3.36 crore equity shares.That means the whole issue is offer for sale and company will not receive any proceeds. As regards the pricing of the issue, no announcement was made till the time this issue of DSIJ was sent for printing.  The management has suggested that it plans to raise anywhere between Rs 1,000-1,200 crore. The simple calculations suggest that the issue being priced in between Rs 300-350 per share. But as everyone knows, the pricing of the issue is important these days and also decides its fate. Even the retail investors nowadays try to skip the issues, unless and until there is something on the table for the investors. So what would be the right price for the issue? That is something we have analysed here. However, let us first understand the business of the company.

The Business
MOIL is the largest producer of manganese ore in India. “We are also the fifth-largest in the world in terms of volume. We cater to 50 per cent of the demand in the Indian markets,” informs K J Singh, CMD, MOIL India. As regards MOIL’s operations, the company owns ten mines, six of which are located in Maharashtra and four in Madhya Pradesh. Out of these seven are underground and three are open cast mines. [PAGE BREAK]

The noticeable factor is that unlike Coal India which produces a higher amount of coal from its open cast mines, MOIL’s production from underground mines is on the higher side. As regards the reserves, the company has access to 69.70 million tonnes of high grade mineral resources. Elaborates Singh: “We have access to 24.50 million tonnes of proved and probable reserves, 37.20 million tonnes of measured, and 7.90 million tonnes of inferred mineral ore resources.” He further states that the reserves have 48 per cent manganese content which is equivalent to international level quality. Apart from this, recently the government has allotted 814.71 hectares of land for mining lease in the Vidarbha region of Maharashtra. The company is yet to access reserves from this land. In addition to that, MOIL also has 20 MW wind generation capacity. It also manufactures value-added products like high carbon ferro manganese (5,00,000 TPA) and electrolytic manganese dioxide called EMD (4,00,000 TPA).

Pricing And Realisation
Pricing is an important factor deciding the profitability of any company and it directly depends on the demand and supply scenario. In this case, manganese is mainly utilised in the manufacturing of steel and the demand stands at around 2.30-2.40 million tonnes. Being the largest producer in India and catering to around 50 per cent of the demand, MOIL has been a price-setter. According to the management, the prices are reviewed on a quarterly basis after taking into account the demand-supply situation. MOIL also has a long-term contract with SAIL through its subsidiary Maharashtra Electrosmelt which is the single-largest customer contributing about 22 per cent of its revenues. As regards the threat from imports, the management has stated that its prices are lower than the landed cost of imports. The basic factor is that its mines are centrally located and hence it becomes an added advantage in terms of transportation. In terms of domestic competition, the next largest player is Tata Steel which is a captive user and others like Sandur Manganese and OMDC contribute only 5 per cent each. So the company has a lead in dictating the price scenario. By way of realisations, in H1FY11 the aver-age realisation was around Rs 11,000 per tonne. This is almost near to the previous peak levels at a time when the demand for steel was skyrocketing in 2007-08. The management has stated that it expects the realisation to be sustained at these levels.

Expansion Plans
Although the company is not receiving any proceeds from the IPO, it has strong reserves of Rs 1,700 crore and has already drawn up expansion plans with capex amounting to around Rs 1,000 crore to be funded through internal accruals. It plans to expand its manganese production capacity from 1.10 million tonnes to 1.50 million [PAGE BREAK]

tonnes till FY15. The capex is estimated at Rs 768 crore. Further, to add more value-added products to its kitty, it has entered into joint ventures with SAIL and Rashtriya Ispat Nigam (RINL) to set up ferro alloy plants at Chattisgarh and Andhra Pradesh respectively. In its JV with SAIL the company plans to set up a 1 lakh TPA ferro alloy plant with a capex of Rs 400 crore, with MOIL infusing equity of Rs 100 crore. Project is expected to go on stream in FY12. In JV with RINL the company is planning to set up 50000 TPA ferro alloy plant with a capex of Rs 200 crore. MOIL will make equity infusion of Rs 50 crore. The project is expected to go on stream by the third quarter of FY12. The management has also stated that it is looking for mines in South Africa, Turkey, Congo, and Zambia.

Growth Drivers
While we are talking about the expansion plans, investors must be curious to know from where will the growth come from. As mentioned earlier, the demand for manganese ore is directly linked to the demand from steel industry. With the steel capacity in India likely to touch 125 million tonnes in 2013-14, the management is quite bullish about the demand growth. But we believe that dependence on a single sector makes the company more vulnerable to the volatility in terms of realisation. In FY10, a similar situation had taken place when the demand for steel had declined significantly and MOIL’s realisation had been shot down by more than 50 per cent. But the management feels that it was an extraordinary scenario and hence must be treated as an exception.

Financial Performance And Valuations
The financial performance of the company has been quite good in the past with the exception of FY10 as the realisations were down in that year. But the volume growth has been very good every year. In FY10 the realisation declined significantly to Rs 1,087.85 crore as compared to Rs 1,439.40 crore in FY09. The bottomline also declined to Rs 466.36 crore as compared to Rs  663.79 crore respectively. But the scenario changed in FY11. For H1FY11 it posted topline of Rs 635 crore and bottomline of Rs 330 crore as against Rs 433 crore and Rs 201 crore respectively in H1FY10. The management expects to sustain the growth and hence is anticipating another round of good performance in H2FY11.[PAGE BREAK]

Taking that as the base of our calculations we expect the company to post a net profit of Rs 660 to Rs 680 crore. This results in an EPS of Rs 40. Considering the P/E ratio of 8 which is enjoyed by many an international company, we feel that the fair price should be around Rs 320. But as the investors will be looking for gains, the price could move in the range of Rs 270-280. In our opinion the government has learned a lesson from the Coal India IPO about the fact that right pricing will always attract the investors. MOIL is providing a 5 per cent discount to retail investors. If the issue is offered under the fair price mentioned by us, investors would do well to chip in for this IPO.

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