Fundamentally strong MOIL

MOIL Ltd, whose initial public offering (IPO) opens for subscription today, seems to be attractively priced considering its strong fundamentals and investors can subscribe to the issue for decent gains in the medium term.

MOIL, the largest manganese ore producer in India, accounts for over 50% domestic marketshare and is well positioned to benefit from strong growth in steel production capacity in India. The company has access to almost 17% (21.7 million tonnes) of total proved and probable reserves in India and also holds 69.5 million tonnes of measured, indicated and inferred mineral resources of manganese ore.

The demand for manganese ore, which is primarily used in manufacturing of ferro alloys for steel production, would remain strong in coming years as Indian crude steel production capacities almost double from 66.34 million tonnes in 2009 to 124 million tonnes by 2012. To cater to the growing demand, the company is looking to ramp up its manganese ore production capacity from 1.1 million tonnes per annum (mtpa) currently to over 1.5 mtpa by year 2016 with an estimated capex of around Rs768 crore.

MOIL is also involved in exploration and development activities to increase its manganese ore reserves. The ministry of mines has allocated 814.71 hectares in Maharashtra for MOIL to explore potential mineral deposits. MOIL has applied for prospecting licences with respect to this area.

Apart from being the largest producer, MOIL has an edge over its peers in domestic and international markets because of its superior ore quality. The company’s proved and probable manganese reserves are better in quality than other producers as almost 55% of these reserves have average Mn (manganese) content of over 40% while 27.5% of them are with Mn content of 36-39.9%.

The company, which has seven underground mines and three opencast mines, also benefits from favourable geological and mining conditions which enable easy extraction, making it one of the lowest cost producers in the world.

The company, which derives almost 85% of its revenues from manganese ore sales, is also engaged in production of value-added products such as high carbon ferromanganese and electrolytic manganese dioxide. MOIL is looking to expand its value-added production capacity from current 10,000 tonnes per annum (tpa) to 163,500 tpa for which it has entered into two separate joint ventures with SAIL and Rashtriya Ispat Nigam Ltd.

Also, it has beneficiation facilities at its two plants to upgrade the quality of manganese ore and a captive wind power generation plant of 20 mw. These forward integration initiatives would lead to better margins and aid revenues for the company going forward.

The company has over the last three years consistently reported operating margins of over 71% (except for fiscal 2010 due to global slowdown) and has reported net profit margins close to 50% during this period. Further, it has strong cash flows and is debt-free with cash reserves of Rs1,763 crore. At the upper end of the price band of Rs340-375, the stock is available at 13.5 times its fiscal 2010 earnings per share and 9.5 times its expected fiscal 2011 earnings (based on half-yearly numbers). Retail investors, who are getting 5% discount on the final price set by the company, may subscribe to the issue considering its strong position and fundamentals.