MOIL - BUY

Investors could consider buying shares in manganese producer MOIL. Attractive valuations after the sharp dip in share price over the last year, and the company's plans to double output makes for a compelling investment case.

The company's enterprise value (EV) discounts its trailing 12-month operating profits by 4.3 times. This is at a discount to earlier levels and does not fully capture the company's dominant domestic market position and low-cost operations. The cost advantage along with cash reserves of around Rs 2000 crore and zero-debt status provides the company an edge over competition and gives it sufficient headroom for expansion plans.

Realisation Drop in 2011

MOIL provides roughly 40 per cent of India's over two million tonnes of annual manganese requirement. About 90 per cent of this is used by steel-makers who produce ferro-alloys to toughen up their steel products. Manganese consumption moves lock-step with steel consumption.

In the calendar year 2011, global manganese production rose by around nine per cent. This was higher than the 6.8 per cent growth registered in global steel consumption. The excess production weighed on global manganese prices. High inventory build-up in China, coupled with a supply glut from geographies such as South Africa and Indonesia, impacted prices. By end-2011, manganese prices had slipped by 40 per cent from the start of the year.

MOIL's sales and profits for the nine months ended December 2011 have shown the strain. Net sales slipped by 21.4 per cent to Rs 698 crore as price cuts undertaken in latter part of 2011 lowered average realisations.

MOIL's operating margins, which have traditionally hovered between 60 and 70 per cent since FY08, fell to 50 per cent during the nine month period. The 47 per cent higher other income of Rs 140 crore earned on its cash holdings during the period did stem the drop in net profits, which slipped by 31 per cent to Rs 311 crore. The resultant dip in investor sentiment caused the stock price to dip.

Turnaround possible

MOIL needs better volumes and realisations to turn things around. The latter may be on the way. The Indonesian government slapped a 20 per cent levy on exports of manganese ore starting this month. Indonesia is a major exporter of manganese and the levy could make things tough for high-cost capacity in the country.

BHP Billitonhiked rates on manganese shipments from Australia. These early signs bode well for MOIL, which will benefit from increase in global rates. A weaker rupee also makes imports of manganese more expensive, this again works in MOIL's favour.

In the long run, freight costs incurred by inland ferro-alloy companies to import manganese could also provide an edge to MOIL. The company banks on the fact that new manganese mine additions are expensive.

The company's cost of production ranks among the lowest in the industry. This bestows it with high margins and staying power.

MOIL's production cost has been rising over the last five years on account of increased wage bills and spending more to increase mine output. But the company expects increased output in the coming years to more than compensate for higher costs.

Output boost needed

MOIL currently produces around one million tonnes of manganese products. Volumes have remained stagnant over the last few years. Higher volumes, an essential imperative, may materialise over the next three-four years.

The necessary regulatory approvals to increase output are in place.

India's current steel production capacity is around 75 million tonnes per annum. . The country's target of achieving steel production of 100 million tonnes per annum by 2012 could take a year or two more. As steel production improves, MOIL has incentive to produce more manganese.

The company aims to double its mine output by 2016 to over two million tonnes . Risks facing the company include competition from domestic producers. . Additionally, imports will remain a threat. Further delays in domestic steel capacity additions will also hurt the company.