MOIL - Buy

India's largest manganese producer, MOIL, has witnessed a 30 per cent correction in its stock price in the last three months following a sharp correction in manganese ore prices and weak global growth outlook. This provides investors the opportunity to accumulate the stock at attractive valuations.

A growing domestic market for steel, industry-topping profit margins, zero debt and high cash reserves make MOIL a very good defensive bet. The stock trades at 8.2 times trailing twelve month earnings which is at a discount to fellow public sector miners such as NMDC. On an EV/EBIDTA basis, the company trades at 3.5 times, which is at discount to global mining peers.

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MOIL has had to cut manganese prices by as much as 40 per cent as global prices tumbled on fears of excess supply. This took its toll on the company's June quarter results. Both net sales and profits fell by 40 per cent to Rs 210 crore and Rs 109 crore, respectively.

However, demand for manganese has remained fairly stable with global steel production, one of the largest manganese consumers, rising by 8.3 per cent over the first eight months of 2011.

Manganese prices are now approaching levels at which several global producers, especially in South Africa and Indonesia, could find it unprofitable to continue production. Any further slide in manganese prices could trigger high-cost miners to shut shop, providing a floor to prices.

In this context, MOIL's operating profit margins of 61 per cent from mining operations during the first quarter of FY12 (67 per cent during FY11) provide the company with the staying power to tide over volatile manganese prices.

The company is a zero-debt entity and has accumulated Rs 2,000 crore in cash (48 per cent of market cap). This cash will comfortably fund the company's plan to spend around Rs 120 crore to expand output from two mines by the end of this fiscal.

The targeted off-take of 1.2 million tonnes in FY12 should result in volume growth of around 15 per cent which could help offset the decline in realisations to some extent. Around 60 per cent of the company's output is of high-grade ferro-manganese whose realisations hold up better than lower grades.

Though imports do meet a third of domestic manganese demand, the consumers are mostly in the hinterland and they incur significant freight costs.

Indian steel production is poised to jump by around 40 per cent over the next four years, and manganese demand is expected to keep pace. MOIL's expansion plans include increasing output from its mines to 1.5 million from the current 1.1 million over the next four years. Also in the offing are two ferro-alloy plants to be built in collaboration with SAIL and RINL.

The company currently pays out 4.2 per cent of its net sales (excluding other income) to the Government as royalties. The recently approved new Mining Bill will double this payout. However, the company's margins provide it with the cushion to absorb this blow.