MOIL: Strength from steel - Buy

This manganese ore maker will benefit from the positive outlook for infrastructure

Infrastructure investments and government policy geared towards reducing imports and encouraging exports bode well for the steel sector. Investors who want to bet on this can take an indirect exposure through State-owned MOIL, a manganese ore producer. It is a key ingredient in steel making; MOIL produces over half the country’s manganese ore and is the only high-grade ore producer in India. The company has large reserves – of over 81.5 million tonnes unit (mtu) — which could last over 75 years at the current annual production rate, spread over 10 mines.

MOIL’s stock was on an uptrend in the second half of 2016 as demand and prices increased. The stock nearly doubled — from a low of about ₹217 per share in May 2016 to ₹417 in early 2017. Price has corrected since, after the company lowered ore prices. The current price of ₹316 discounts its trailing 12-month earnings by 22 times. This is higher than its three-year historical average of about 18 times, but still reasonable considering the sector’s prospects.

Investors can buy the stock, given the company’s strong fundamentals, robust revenue and profit outlook on the back of its expansion plans. MOIL’s leadership position in the segment, improving steel demand and sizeable ore and cash reserves make the stock a good pick for the long haul.

Good prospects

MOIL’s sales volumes increased strongly in the nine months of 2016-17. Sale of fines and non-fine ore was 0.92 MT in this period, compared to 0.59 mt during the same period in 2015-16.

About 85-90 per cent of the ore demand is from the steel industry. Crude steel production increased 9.3 per cent y-o-y during April-February 2016-17 to 89.1 mt. Finished steel imports declined 38.5 per cent during this period to 6.6 mt, while exports jumped 77.6 per cent to 6.62 mt.

The battery industry is the second-largest consumer of manganese. Growth in alkaline battery and lithium-ion battery with manganese markets should further boost demand.

The Indian Bureau of Mines projects local manganese ore production in 2020-21 at about 5 mt (2.5 mt currently) to meet demand. MOIL, being the leader in the segment, will benefit from this growth.

The company plans an output of 1.15 MT in 2017-18; it is actively working on expansions to double output by 2020 and has investment plans of about ₹1,500 crore up to 2020-21.

MOIL has sizeable cash reserves — ₹2,200 crore as of December 2016 — to fund its capital expenditure. These investments will aid revenue and profit growth over the long term.

Besides ore, MOIL earns 10 per cent of revenue from chemicals such as ferromanganese and electrolytic manganese dioxide. It plans to set up a joint venture with Steel Authority of India and Rashtriya Ispat Nigam to produce alloys, as part of upstream expansion.

Sound financials

Revenue increased 74 per cent y-o-y in the nine months of 2016-17 to ₹737 crore, due to higher sales volume and price. Realisation for fines (85 per cent of volume) increased 13 per cent y-o-y to ₹8,026 per tonne. Average sale price of non-fines also increased 5 per cent y-o-y to ₹2,682 per tonne.

Operating profit increased 71 per cent in the same period to ₹135 crore.

Net profit increased 25 per cent to ₹ 190 crore. Profit growth lagged revenue growth due to lower interest income.

Ore prices, which zoomed globally in 2016, have been slowing. MOIL cut prices by 15 per cent (for 44 per cent and higher manganese content) and 10 per cent for other grades in January 2017. For the April-June 2017 quarter, similar price reductions were made.

While lower prices may impact revenue, it can boost sales volume as bulk of the ore demand is from the local steel industry.

Also, while significant price upside may be limited, globally, increasing steel output should provide support for sustainable and improving manganese ore prices.

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