MOIL India IPO - Buy

MOIL India IPO
 
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 got successfully listed even the follow-on public offer for Power Grid Corporation of India got oversubscribed significantly. Next in the line is a Mini Ratna company, Manganese Ore India (MOIL India). The recent initial public offering (IPO) of Coal India was a miss for many and the kind of fantastic listing Coal India has provided those who did not invest should be cursing themselves. Many of them might be looking for the next better opportunity to offset the notional losses by investing in other PSU offering. It is true that MOIL is India’s largest manganese ore producer by volume and investors are eagerly waiting for the same. But after the listing of Coal India, a few things have changed and market has witnessed some amount of uncertainty.  So the moot question is whether to invest in the MOIL 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 offered for sale and company will not receive any proceeds. As regards the pricing of the issue, the price band is Rs 340-375 and the government will raise Rs 1238 crore. Now everyone knows that the pricing of the issue is important these days and also decides the fate of the issue. Even the retail investors nowadays try to skip the issues, unless and until there is something kept on the table for the investors. We feel the offer price is bit higher than the fair price of Rs 320 suggested by us while analyzing the IPO in our Journal. And hence considering this factor, we feel the issue may not yield the kind of returns Coal India had provided at the time of listing. But still being a PSU company it is a good long-term investment.
 
Understanding the Business

MOIL is the largest producer of manganese ore in India. “We are the largest producer of manganese ore in India and the fifth-largest in the world in terms of volume. We cater to the 50 per cent demand in Indian markets,” explains K. J Singh, CMD, MOIL India. As regards the operations the company owns 10 mines located in Maharashtra (6 mines) and Madhya Pradesh (4 mines). Out of these, 7 are underground and 3 are open cast mines. The noticeable factor is, unlike Coal India which produces higher amount of coal from open cast mines, MOIL produces higher amount of manganese from underground mines.

As regards the reserves, the company has access to 69.70 million tonnes of high grade mineral resources. Singh explains, “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 explained that the reserves have 48 per cent manganese content which is equivalent to good, international quality. Apart from this, recently the government has allotted 814.71 hectares of land is being awarded for mining lease in Vidarbha region of Maharashtra. The company is yet to access reserves from this land. In addition, 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 Realization

Pricing is an important factor deciding the profitability of any company and the pricing depends on the demand - supply scenario. Regards the demand supply situation, manganese is mainly utilized in the manufacturing of steel and the demand stands at around 2.30-2.40 million tonnes. Being a largest producer in India and catering to around 50 per cent of demand, MOIL has been the price setter. Here the management has explained that the prices are reviewed on a quarterly basis, looking at the demand-supply situation. MOIL also has long-term contract with SAIL (through SAIL’s subsidiary - Maharashtra Electrosmelt), which is the single-largest customer contributing about 22 per cent of its revenues.

As regards the threat from the imports, management has stated that its prices are lower than the landed cost of imports. Since its mines are centrally located, it becomes an added advantage in terms of transportation. Regarding the domestic competition, 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 been a price setter in the market. As regards the realization, in H1FY11 the average realization is around Rs 11000 per tonne. This is almost near to the previous peak levels, when the steel demand was skyrocketing in 2007-08. Management has stated that it expects the realization to sustain at these levels.
 
Expansion Plans

Although the company is not receiving any proceeds from the IPO, the Company has strong reserves of Rs 1700 crore and has already drawn up expansion plans with a capex amounting to around Rs 1000 crore to be funded through internal accruals. It plans to expand its manganese production capacity from 1.10 million tonnes to 1.50 million 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 the JV with SAIL the company plans to set up one lakh TPA ferro alloy plant with a capex of Rs 400 crore, with MOIL infusing equity of Rs 100 crore. The 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 third quarter of FY12. The management has stated that it is also looking for mines in South Africa, Turkey, Congo and Zambia.
 
Growth Drivers

While we are talking about expansion plans, investors must be curious to know where the growth will come from. As mentioned earlier, demand for manganese ore is directly related with 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 dependence on one single sector makes the company more vulnerable to the volatility in terms of realization. In FY09, the similar thing happened, when the demand for steel declined significantly and MOIL’s realization declined by more than 50 per cent. But the management feels that was an extraordinary scenario and hence is an exception.
 
Financial Performance and Valuations

The financial performance of the company has been quite good in the past with the exception being FY10 as realizations were down in that year. But the volume growth has been very good every year. In FY10, the realization declined significantly the total declined to Rs 1087.85 crore as compared to Rs 1439.40 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 a 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 expecting another round of good performance in H2FY11. Considering the same, we expect the company to post a net profit of Rs 660 to Rs 680 crore. This results in the EPS of Rs 40. Considering the P/E ratio of 8 what the international companies enjoy we feel the fair price to be around Rs 320. Even if we consider the premium, it may get on account of its higher market share in manganese ore market the fair price arrives at Rs 360. But the issue price is between Rs 340-375 which is higher than the fair price arrived at by us. MOIL is providing a 5 per cent discount to the retail investors, and hence some amount of gains may be enjoyed by the retail investors. But still we feel the issue is not priced attractively. Considering this factor, it may not yield the kind of returns Coal India had provided at the time of listing. But still being a PSU company, it is a good long-term investment.