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Key Investment Highlights

Favorable demand- supply scenario

On the back of a 9.2% CAGR in the domestic steel consumption demand for Managanese is expected to more than double from 2.4 mt to ~ 5 mt by FY12. Approximately 90% of the Manganese ore is used in steel production and with India being a net importer of manganese, the company is well placed to benefit from the demand supply mismatch.

Largest producer of Manganese ore; high reserve base

MOIL is the largest producer of Manganese Ore in India (516,749 tonnes for H2FY11) and accounts for almost 50% of India's total production. It has access to significant resources and reserves and 55% of its proved and proven resources have average manganese content of 40% or higher, 27.5% of its proved and proven resources have average manganese content of 36-39.9%. This combines favorably with the Indian manganese reserves, 51% of which are of low or mixed grade.

Eyeing Overseas Acquisitions to expand resource base

With the limited manganese reserves in the country and on the back of growing steel demand, MOIL is all set to expand its resource base. MOIL along with NMDC, India's largest iron ore producer, is exploring opportunities in South Africa, Congo & Turkey to expand its resource base. Besides manganese, MOIL is also diversifying its product portfolio and eyeing nickel & chromite properties abroad.

Low cost of mining and huge cash reserves make for compelling financials

MOIL is a low cost producer of managanese with the average cost of mining of Rs 2058 per tonne. Its debt free capital structure with cash reserves of Rs 17,629 million provides it sufficient resources to fund its expansion and acquisition plans, support the working capital requirements

Value addition through increased presence in ferroalloys and renewable energy

MOIL has entered into a joint ventures with Steel Authority of India Ltd and Rashtriya Ispat Nigam Ltd to set up ferroalloy plants in Chhattisgarh and Andhra Pradesh, respectively. These are collectively expected to produce ferromanganese (with a total installed capacity of 51,000 TPA) and silico manganese (with a total installed capacity of 112,500 TPA).

MOIL also diversified into renewable energy and has set up wind farm of 20MW capacity in the Nagda/Ratedi Hills in Madhya Pradesh for captive power.

Robust expansion plans to increase production

The company has chalked out robust plans with a capex of Rs 84 crore & Rs. 107.7 crore for FY11 and FY12, respectively to expand its production capacity and has undertaken extensive initiatives such as formation of Joint Ventures, expansion of resource base and optimization of capacity utilization. It has already spent Rs 241.8 million as on 31st Oct 2010.

Key Concerns

Overdependence on a few customers

For FY2010, 51.5% of MOIL's revenue is represented by its top ten customers. Maharashtra Elektrosmelt Limited and Bhilai Steel Plant, subsidiaries of SAIL together accounted for 22.1% of the company's manganese ore sales revenue in FY10. If it fails to enter in new agreements with these key customers it would adversely affect its revenue.

Seven out of ten mines are underground

The company operates seven underground mines. Underground mines are hazardous and involve inherent risks and have higher cost of production than open cast mines. MOIL is a preferred player due to its low cost production and any increase in production costs from underground mines would adversely affect the business.

Valuation & Recommendation

MOIL is valued at its P/BV of 3.4x and 3.7x at the lower & upper price band respectively. The company's RoNW stands at a comfortable 27.8% and a competitive P/E of 12.3x and 13.5x at its lower & upper price band, respectively, which gives a strong signal of growth. With the company having attractive valuation, a sustainable business model, a large resource base and traction in demand, we recommend a SUBSCRIBE on the company for listing gains as well as for a medium to long term horizon.

Source : Equity Bulls

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