MOIL - IPO Review

Investors could consider applying to the IPO of Indian manganese producer MOIL India, which appears attractively priced given its quality ore reserves, low operating costs and booming domestic market. At the higher end of the offer price band with the retail discount factored in (Rs 356.25), the company would trade at an EV/EBIDTA ratio of 4.6 times and 10.5 times its trailing 12-month earnings. The enterprise valuation is at a discount to global peers such as Eramet and Eurasia Natural Resources.



THE MODEL

Manganese ore, which the company mines, is processed into ferro-manganese alloys such as High Carbon Ferro Manganese or Silica Manganese which are inputs for steel production (stainless steel as well). These alloys help improve the quality of steel through increased corrosion resistance and hardness.

MOIL produced over a million tonnes of manganese in the last fiscal. Most of its output is sold domestically in the ore form to ferro-alloy producers such as Maharashtra Elektrosmelt and SAIL's Bhilai Steel Plant, among others.

The company's net sales and profits grew at a compounded growth rate of 32 and 51 per cent to Rs.969 crore and Rs.466 crore, respectively, between FY07 and FY10, thanks to capacity additions at the company's two largest mines of Balghat and Dongri-Buzurg. Aided by 10 per cent growth in domestic steel consumption and higher steel prices, the first half of FY2010-11 saw net sales and profits soar by 48 and 64 per cent to Rs.635 crore and Rs.331crore, respectively.

The company's high-quality reserves, coupled with low mining leases, royalty and labour costs, make for low operating costs, making it one of the most cost-efficient global miners of manganese with net profit margins in the 48-51 per cent range over the last three fiscal years. The company's growth plans include spending over Rs 1,000 crore over the next five years on raising ore output to 1.5 million tonnes in 2014 from the current 1 million tonnes and setting up two value-added ferro alloy production facilities with a capacity of 1,63,000 tpa.

Mine expansion is expected to cater to the domestic steel consumption, which is expected to grow by 9 per cent per annum over the next five years. For the ferro-alloy plants, the company has entered into joint ventures with RINL and SAIL.

To fund its expansion plans the company could using existing cash holding of Rs 1,760 crore (Rs 104 per share), use leverage (it is currently a zero debt entity) or turn to its solid operating cash flows.

Benchmarked to global rates

The company currently sells manganese ore on quarterly pricing based on the international benchmark set by Japanese steel producers in discussion with manganese producers such as BHP Billiton, Vale, Assmang, among others.

Manganese prices are up over 30 per cent in the year till date and prices have held up much better against the roller coaster ride of the last two quarters, thanks to severe production cuts undertaken by ore producers during the commodity collapse of late-2008.

Logistical bottlenecks in ore-heavy geographies of South Africa have helped miners of high-quality ore, such as MOIL, charge a premium to international prices.

However, manganese supply and prices are directly linked to steel output and prices, since ferro-alloy producers account for over 90 per cent of manganese consumption. Steel prices have had a rough ride since the start of the year with any sign of pricing momentum thwarted by negative news. The most recent is the Irish debt crisis and further Chinese efforts to cool its economy.

With prices expected to remain flat over the near term, manganese ore prices are expected to remain on a tight leash as well. Despite these jitters, a healthy domestic market in short supply of manganese, high-quality ore reserves and industry topping margins provide MOIL with a semblance of a defence against increasingly volatile steel markets.

RISKS

The heavy dependence on demand from the steel sector leaves the company's realisations broadly exposed to the increasingly volatile steel cycle.

Another key risk for the company is hurdles to obtain mining permits and environmental clearances for the mines it operates. The company is awaiting licences or renewal for 23 per cent of its total mining leases. The company's top three mines of Balaghat, Donni Buzurg and Ukwa account for close to 70 per cent of its total reserves. They account for an even higher percentage of the company's high grade ore reserves which enables it to command a premium.

The company currently pays a royalty of between 1 and 3 per cent of the manganese ore it sells. In the event of the implementation of the proposed mining Bill the company would be required to pay 26 per cent of its profits to the local population, which would have a material effect on the company's profitability.

Its reserves are estimated at just over 24 million tonnes of manganese ore, providing the company revenue visibility for 15-20 years at current rates of production. The company is reported to be scouting or exploring buyout opportunities for domestic and overseas manganese assets to augment its existing reserves.

ISSUE DETAILS

The proceeds of this offer, which could range between Rs 1,120 crore and Rs 1,235 crore are entirely by way of divestment and will be shared by the Union Government and those of Maharashtra and Madhya Pradesh. 20 per cent of the company's shares are on offer at a price band of between Rs 340 and Rs 375 (After 5 per cent discount Rs 323-356 for retail investor

via BL