MOIL - Monopolising Manganese - IPO priced attractively - Angel Broking

MOIL, a Miniratna PSU, accounts for nearly 50% of India's manganese ore production. We recommend Subscribe and Initiate Coverage on the stock with a Target Price of Rs.461, valuing it at 5x FY2012E EV/EBITDA, as MOIL sells high-to-medium grade manganese ore at market-linked prices, expanding its production capacity at existing mines and is attractively valued as compared to peers.

Is MOIL better placed than CIL and NMDC: Our analysis of the three companies on eight different factors, classified under the parameters of industry, business and valuation, clearly indicates that MOIL is better placed to NMDC due to its attractive valuations. However, when compared to CIL, MOIL stands lower as its fortunes are closely linked to steel industry (cyclical) and its earnings are subject to high risk, if the proposed 26% mining tax is implemented, although debatable.

Leader in the Indian manganese ore market: MOIL is expected to maintain its market share as it augments its production capacity at existing mines to 1.5mn tonnes by FY2016E (1.1mn tonnes in FY2010). At Balaghat, Gumgaon and Munsar, shaft sinking and deepening of existing shafts is underway. The company is also expanding its value-added capacity and has entered into JVs with SAIL and Rashtriya Ispat Nigam Ltd. (RINL) to set up two ferro-alloy plants in Chhattisgarh and Andhra Pradesh. The proposed installed capacity in case of the JV with SAIL is 1,06,000 tonnes and that in case of RINL is 57,500 tonnes. The plants are expected to be commissioned by June- July 2012.

Sharper earnings trajectory: In the near term, we expect flattish volume growth as benefits of expanded capacity will accrue stream post FY2012E. However, we expect manganese ore realisations to increase by 51.1% to Rs.11,700/tonne in FY2011E and to Rs.11,800/tonne in FY2012E from Rs.7,744/tonne in FY2010. Moreover, MOIL is relatively insulated from volatility in its salary cost, as the wage agreement is effective for a 10-year period. Thus, EBITDA margin are likely to expand by 946bp to 71.6% in FY2012E. Consequently, EBITDA is expected to report a 32.3% CAGR over FY2010-12E.

IPO priced attractively: At the issue price, MOIL looks attractive as compared to Citic Dameng Holdings (Citic), a leading manganese ore producer of China that was listed on the Hong Kong exchange on November 18, 2010, to raise HK $2.06bn (US $266mn). The company operates in China and Gabon. In 2009, the company produced 1.1mn tonnes of manganese ore. Citic has a resource base of 97.2mn tonnes. Citic is currently trading significantly higher at 20.6x CY2010E EV/EBITDA, whereas MOIL trades at 4.2x FY2011E EV/EBITDA.

In comparison to the recent listing in the Indian mining space, MOIL trades at 4.2x and 3.6x FY2011E and FY2012E EV/EBITDA, while CIL and NMDC are trading in the range of 6-13x EV/EBITDA. Further, MOIL is priced at a discount of ~30% as compared to global diversified miners.

Key risks: 1) A decline in manganese ore prices, 2) limited mine life for few mines, 3) downturn in the steel cycle and 4) implementation of the proposed 26% mining tax.

Source : Equity Bulls

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