Stock call. MOIL: Going strong - Buy

With the revival in the steel market globally, the prospects of the raw material industry have also turned attractive. In this light, MOIL, India’s largest manganese ore producer with about 81.47 million tonnes of reserves and resources, is poised to capitalise on the growth in India’s steel demand.

The performance of the manganese ore industry is directly linked to that of the steel industry.

Manganese is used as an alloy in the production of steel to increase its strength. It takes around 32 kg of manganese to produce one tonne of steel.

With increasing demand for steel, domestically, and the company’s various mine development and expansion projects in place, MOIL is well-placed to cater to the increasing demand for manganese ore in the country, which is otherwise imported to a large extent.

Financially too, the healthy operating profit margins and its debt-free status are positives for the company.

At the current market price of ₹192, the stock is reasonably valued at about 12 times its trailing 12-month earnings, 18 times lower than what it traded at on an average over the past three years. Long-term investors with a medium-risk appetite can consider buying this stock.

MOIL’s dividend yield has been healthy, at about 2-5 per cent over the past few years.

Demand visibility

The company derives about 90 per cent of its revenue from the sale of manganese ore. Currently, MOIL is the largest producer of manganese ore in the country with a share of about 45 per cent.

Indian steel companies also import large quantities of high-grade manganese ore as it is not available in sufficient quantities domestically. This shortage provides an opportunity for MOIL to increase its production capacities and cater to the rising demand for the raw material.

The demand for manganese ore is directly linked to the performance of the steel sector. Indian steel demand is expected to accelerate gradually, driven by public investment and the growth in the automobile and construction sectors.

According to the World Steel Association, India produced 26.68 million tonnes of crude steel in the first three months of 2018, which indicates a 3.7 per cent growth, compared to the same period a year ago. For finished steel, it projects growth rates of 5.5 and 6 per cent for 2018 and 2019, respectively.

According to the latest National Steel Policy, 2017, India has set a capacity target of 300 million tonnes of steel by 2030-31; this expansion is expected to create domestic demand for manganese ore to the tune of 10 million tonnes.

Expansion to meet demand

In order to achieve the production targets, MOIL has taken up various mine development and expansion projects that include setting up of high-speed shafts at Balaghat and Gumgaon mines in Madhya Pradesh and Maharashtra respectively, with a total investment of about ₹460 crore. These projects are expected to double production from these mines — from about 3.7 lakh tonnes to 7.4 lakh tonnes by FY24-25.

Also, with a view to diversifying its activities, the management has recently approved projects for setting up of ferro alloy plants of total 75,000 tonnes capacity at Balaghat and Gumgaon Mines, with a total investment of about ₹419 crore. For FY-19, the company envisages a production target of 13.25 lakh tonnes or 1.3 million tonnes of manganese ore and has a capex target of around ₹200 crore.

Healthy financials

The company has reportedly recorded the highest-ever sales of non-fines (lumps and chips) manganese ore during FY-18.

For the nine-month period, it recorded a revenue of nearly ₹926 crore, an increase of 25.6 per cent y-o-y. This is due to better realisations in the period, which are at an average of ₹9,877 per tonne, up 34 per cent y-o-y. Net profit had also grown by a good 55 per cent to about ₹294 crore.

MOIL’s operating margins are also high. For the nine months of FY-18, the operating profit margins stood at nearly 53 per cent; it was around 52 per cent for FY-17. However, it has dropped from the levels of 84 per cent in FY-15 due to higher costs and negative stock adjustments, but is still reasonably healthy.

Note that MOIL fixes the price for its output on a quarterly basis, based on global prices and demand-supply in India. It has been able to pass on costs consistently.

Risks

There were instances of the company missing its production targets. (For example, the company targeted 1.5 million tonnes for FY-2017, while the actual production was a little more than one million tonnes).

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