ValuePickr Forum

Moil

i recently analysed the MOIL IPO on my blog at : http://thriftyinvestor.blogspot.com/2010/12/moil-ipo-analysis.html

I believe it has the makings of a good long term bet rather than just a buy for Listing gains.The following is my analysis:

**Company Profile **

MOIL, a Miniratna PSU, accounts for nearly 50% of Indiaas Manganese ore production. Currently, MOIL operates 10 mines located in Maharashtra (six mines) and Madhya Pradesh (four mines). In addition to Manganese ore production, the company has diversified into high value-added products HCFM and EMD. The company also operates two wind power plants, with total capacity of 20MW, in Nagda hills and Ratedi hills, Madhya Pradesh.

The IPO entails issue of 3.36cr equity shares priced in the band of Rs 340a375). The issue of 3.36cr equity shares by the central and state governments represents 20% of the companyas total outstanding share capital. The company will not receive the offer proceeds, as the proceeds are part of the government’s divestment plan.

Strengths

  1. _Largest producer of manganese ore in India with access to significant reserves _: MOIL accounts for nearly 50% of Indiaas manganese ore production, distantly followed by Tata Steel (16%), Sandur Manganese (10%) and Rungta mines (7%). The company holds approximately 17.0% of the proved reserves of manganese ore in India which is 21.7 million tonnes of proved and probable reserves and a total of 69.5 million tonnes of measured, indicated and inferred mineral resources of manganese ore. 55.0% of MOIL’s ore reserves have an average manganese content of 40.0% or higher & 27.5% have an average manganese content of 36.0%-39.9% & none of the mines produce low grade manganese (i.e., below 30.0% manganese content). __
  2. _Well positioned to capture the growth potential of the Indian steel industry _: As more than 90% of Manganese world over is used in Steel Making, the fortunes of MOIL have been tied to the domestic steel industry. CARE Research expects domestic steel demand to increase at a 9.2% CAGR over FY2011a15). Thus, demand for manganese ore is expected to increase at a 9.0% CAGR over the next two-three years. This is an indirect way to play the Infrastructure story to unfold in India.MOIL due to its significant reserves, is well positioned to serve the increase in demand expected from the steel industry.
  3. _Low cost and efficient operations _: As the largest producer of manganese ore by volume in India, MOIL is able to achieve economies of scale in procurement of input materials, production efficiency, marketing, sales, and other aspects of its operations. The Dongri Buzurg mine is fully mechanized and all other mines are semi-mechanized. Mechanization allows for higher recovery rates, permitting an increasing percentage of manganese ore to be recovered by way of crushing, screening and sorting of waste, thus improving productivity and higher sales. The company owns all the equipment it uses in its operations and third parties are primarily used for overburden removal. This gives MOIL flexibility in operations as it doesn’t depend on third parties for operations.All of the above elements favor cost-efficient production, which increases MOIL’s profitability and make it one of the lowest cost producers of Manganese ore.
  4. _Strategic location of mines provides it with advantages _: MOIL’s mines are located in central India, in the states of Maharashtra and Madhya Pradesh which have well-developed road and rail infrastructure. The central location gives it a marketing advantage over competitors, as it facilitates transportation of products, resulting in lower cost and faster time of delivery for its customers. Also, higher transportation costs associated with imported manganese ore provides MOIL with improved competitive positioning in the market.
  5. _Solid Financials _: MOIL is a debt free Company with 1763 Crs Cash on its books. It benefits from a strong liquidity position that gives it significant flexibility & ability to pursue acquisitions abroad if required. MOIL has enjoyed Healthy Net profit Margins ranging between 43-48% in last 3 years. It also has excellent cash flows & is Free Cash Flow positive.The Company’s strong Balance Sheet and cash flows from operations provide it with sufficient resources to fund projects, working capital requirements and maintain a healthy level of cash on its balance sheet.
  6. _Strong capabilities for exploration, mine planning and research development _: The company is actively involved in exploration and development activities to increase its proved manganese ore reserves. An area of 814.71 hectares in the State of Maharashtra has been reserved for MOIL by a notification from the Ministry of Mines. It has applied for prospecting licenses with respect to this area. MOIL has a planning division that includes geologists and mining engineers that focuses on exploration activities at potential mineral deposits.
  7. Experienced senior management , large pools of skilled manpower & Stable Staff Cost : MOIL has an experienced management team with an average of over 20 years of experience in the mining industry and skilled employees who possess significant industry experience. It maintains good relations with its employees and unions and has not lost any significant employee time due to strikes or labor unrest for the past 25 years. As compared to other PSUs, MOIL is relatively insulated from volatility in its salary cost, as the wage agreement is effective for a 10-year period. The wage agreement for non-executive employees will expire on July 31, 2017 and that for executive employees will expire on December 31, 2016 .Employee costs represent the most significant portion of its operating expenses.
  8. _Expansion through capacity addition and JVs for Forward Integration _: MOIL has undertaken expansion plan at its existing mines to augment its production capacity to 1.5mn tonnes by FY2016E from the current levels of 1.1mn tonnes. At Balaghat, Gumgaon and Munsar, shaft sinking and deepening of existing shafts is underway. MOIL intends to expand its value-added capacity and, thus, has entered into JVs with SAIL and Rashtriya Ispat Nigam Ltd. (RINL) to set up two ferro-alloy plants in Chhattisgarh and Andhra Pradesh. The proposed installed capacity in case of the JV with SAIL is 1,06,000 tonnes and that in case of RINL is 57,500 tonnes. The plants are expected to be commissioned by JuneaJuly 2012). These capacities will enable MOIL to increase sales of value-added products and also improve margins.

**Risks **

  1. Fortunes tied to Steel Industry : The manganese ore industry is highly dependent on the prospects of the steel industry, as 94% of manganese ore produced is used in the production of ferro alloys, which is consumed in the steel industry (90% of ferro alloy produced is used in the steel industry). Manganese ore prices have been very volatile historically and had fallen by more than 50% during the downturn in 2008. Any adverse changes in steel demand can have a negative bearing on manganese ore prices.
  2. Client Concentration Risk : MOIL’s top ten customers represent approximately 51.5% of their sales of manganese ore. Key customers include Maharashtra Elektrosmelt Limited and Bhilai Steel Plant (aBhilaia), which are both subsidiaries of SAIL and which together accounted for 22.1% of sales revenue . If MOIL fails to enter into new agreements on acceptable terms with any of its top ten customers, and SAIL in particular, its results of operations and prospects could be materially and adversely affected.
  3. Implementation of new mining policy to include 26% profit sharing : To curb illegal mining and fast-track approvals for mining rights, the government has proposed a new bill that requires miners to share 26% of profits with local people affected by their mining projects. Recently, the bill has received an in-principle approval from the Group of Ministers (GoM) and the proposed bill is expected to be placed in the parliament for approval during the upcoming winter session. Although the proposed bill lacks clarity, the implications of the new profit-sharing rule on MOILas earnings could be severe.
  4. _Limited mine life for some of the operating mines _: The reserves at Kandri, Beldongri, Chikla and Tirodi are expected to exhaust in the next 6a9 years based on FY2010 production levels. These mines produced 32.5% of the total manganese ore in FY2010. Thus, in the absence of any significant reserves accretion at the existing or new mines, the companyas performance could be affected in the long term.
  5. Other Mining Related Risks : Mining operations are subject to a number of operating risks like poor mining conditions resulting from geological, hydrologic or other conditions; adverse weather and natural disasters, such as heavy rains, flooding and other natural events affecting operations, safety and environmental regulations or changes in interpretation or implementation of current regulations.Seven of the mines MOIL currently operates are underground mines.Underground mining activities are inherently risky and hazardous and prone to fires and explosions.

Financial Performance

MOIL Registered an Impressive Growth in Sales & profits of 22.9% CAGR & 41.8% CAGR respectively from 2001 - 2010 . The chart below shows the trend of Sales & Net Profit Growth. As we can see the growth has been lumpy & the Net profits have gone up significantly since 2005 mainly on account of higher Margins. The Topline grew by 23.% CAGR in past 5 years & 37.7% in past 3 years showing how good the recent years have been for MOIL. Similarly ,the net profits grew by 29.7% CAGR & 52.5% CAGR in last 5 & 3 years respectively.

This can be understood better when looked at with the physical production of Manganese ore & the Cost realization(`000)/Tonne as shown in the chart below from 2001-2010.While the Managnese production grew by just 5.9% CAGR the Price/tonne went up by 24.03% CAGR during the same period. MOIL due to its dominance & quality ore made most of this boom. However the demand grew so much that India was a net Importer of Manganese in the last 3 years.

MOIL being one of the lowest cost producers of Manganese in the world ,has very high Net Profit Margins & Return in Equity(ROE) as shown in the chart below. However between 2001 - 2004 the NPM was just around 9 - 12% but Jumped to 31% in 2005 & has stayed between 31-48% between 2005-2010. The ROE has stayed between 28-59% during the same period. This was mainly on account of better price/tonne as shown above & improved efficiency.

I had the cash flow data of MOIL for only the past 5 years during which it exhibited excellent cash flows and healthy Free cash flow. The chart below shows the Free Cash Flows and net profits between 2006-2010. With the kind of Free cash MOIL has been able to generate one can be rest assured that it will have no problems paying dividends & the cash balance is likely to grow in the future .

Valuation

Considering the amazing response the Issue has already seen its safe to assume that the price will be fixed at upper band of Rs 375 which translates to a price of Rs 356.25 for Retail Investors after the 5% discount. This translates to a Market Cap of 5985 Crs,however due to the 1763 Crs Cash on books the actual value of the company turns out to be 4222Crs . The table below shows the various important valuation metrics for TTM & 3,5,10 Year averages wherever data was available.

** TTM 3Yr AVG 5yr AVG 10yrs Avg **

P/E_ _9.07 7.83 11.34 20.35

P/CF 16 8.85 12.52

P/FCF_ _17 10.11 14.54

P/BV 2.1

Div Yld 1.57%

MOIL looks attractively priced whichever way one looks at it on absolute terms. Especially on Trailing Twelve Months(FY10) & 3yrs avg basis it looks quite cheap for a company with such high ROE and growth. Its important to look at average valuations also as this is essentially a commodity company which is cyclical in nature. It looks reasonably priced even w.r.t. 5yr avg considering the past growth it has had. On a relative basis there is no comparable competitor in India, however MOIL is cheaper than other mining companies like CIL,NMDC,OMDC,Sandur Manganese etc. Globally, Citic a direct peer of MOIL got listed in November in Hong Kong at a P/E of 42 & P/BV of 7. Further when compared to other Global Mining biggies who have lower margins than MOIL it still appears attractively.

I Invite more Views

Good analysis.

I think MOIL at current price of around 400 looks good on medium term investment perspective.

The post IPO selling by disappointed investors seems to have dissipated at around 375 levels.

Its difficult to value such stocks because since it is a sort of monopoly, one never knows where it can go once it catches market fancy. I think it could follow a similar path to coal india wherein all the selling subsided around 300 odd levels and since then the stock has looked extremely strong.

Current price 343. Not too sure why it has corrected so strongly.

It looks attractive to me as a business, and Siddharth’s valuation covers almost everything. The final parameter that I usually look at, the price is also very interesting.

Views invited.

Feedback from a senior investor. Unless you are on top of the commodity sector, you should play cautious, try and track price movements - and that can be difficult for industry outsiders.

_as indicated in one of my weekly update , price realisation has fallen in this sector over last two qtrs.

current qtr it is still lower this is likely to affect bottom line .

stock price too has fallen in line with the above ._

-Donald

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DOnald,

I don’t believe this is another run of the mill commodity play. While Commodities all around have crashed, MOIl too has been impacted. But with a virtual Monopoly, if the amount of steel produced & used in the country in 2015 is going to be much greater than what it is today, MOIL will sell more Manganese & make more money ,a s simple as that. It has a very strong balance sheet & cash flows & i believe this can be the next NMDC/Sesa Goa(which have been gr8 wealth generators in the past decade). Trying to call the commodity cycle can be tough(i have no clue about it). If one can take a more Long term view & envision the profits, i think its going quite cheap today.

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Hi ,

I bought it at 535 today its 303 can i buy more at this level Pls let me have your view. I am long term investor can wait at least 5 years.

The problem with MOIL is two fold

1.Problem of excess, currently moreManganeseis available in market.

2.Historical downturn in metal market is due, after slowdown in China.

Source of 1. I heard interview of MOIL Management.

Hi folks, is anyone tracking Sandur Manganese?

Hey I was having a look on sandur managense. I heard in an interview of UR archarya that Manganese demand will boost 20% Yoy. Also he said that EV will use more steel and hence more managanese.
However I find it opposite. Ev to be more lightweight and there should not be any incremental use of steel compared to today’s scenario.
I did’nt undersatand why he has not taken into account the manganese demand of being used into making batteries. Nissan leaf used 100% manganese apart from lithium.
Whats your view?

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If steel demand picks up manganese will pick up too (used as an additive). Also, electric cars have a higher component of manganese due to batteries.

I think Sandur has managed the demand better and has more profit increase. May be MOIL will catch up and have a bigger gain. I would be buying both, haven’t decided the percentage mix.

Does anyone have more conviction on either of these 2 stocks?

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MOIL - 2QFY18 - HDFC sec-201711151822443577414.pdf (359.8 KB)

I continue to be hopeful on MOIL. At the end of Q2F18 I partially booked profit (when it seemed to have run up a bit), but accumulated again last month when it was in the 180s. The next year or so looks good, as per the HDFC report or private discussion with a couple of mining engineers. The company may not be a steady compounder, but the cash position is pretty good, and they are perhaps going for an alloy plant. Although it may not be a great idea for a mining company to get into alloy plant operations, the thing to take from them is their comfort and confidence. I will watch a few more quarters.

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MOIL 100418 Kotak.pdf (195.3 KB)

MOIL update by Kotak. Safe play in the volatile commodity space.

I beg to differ. It makes immense sense for a mining company to get into alloy production.

  1. An alloy producer procures (transports) ore from mining Co , processes it and transports to the customer. MOIL is setting an alloy plant near its mine. Transportation cost of ore becomes zero.
  2. Making alloy is a value addition.

The various expansion projects are running on schedule (as seen in their corporate presentation) and we will start seeing the production ramp up from FY 20. If Mn prices remain firm, it will become a money spinner.
Regards

Don’t fit in either of the baskets. Not a screaming undervalued stock neither a value buy. Let’s talk about both of them:

  1. Undervalued stock: Company has a cash balance of Rs. 2140 Cr. and market cap. is 4182 Cr. which means the business is valued at Rs. 2042 Cr. by the market. From the graph, it is clear that the manganese Ore prices are cyclical in nature.


In 2016 the manganese ore prices dropped significantly. Now, Let’s look at the valuation and financials of the company in 2016:

  • Analogy I: The Cash balance FY16 is Rs.2850Cr. Which translates into Per share cash value of Rs.110.6 (Rs.2850 Cr./25.76Cr. (total no. of shares outstanding)). The lowest price at that time is around Rs.93


    Now, Who wants to buy today when we know that Mr. Market will give it at a discount during depressed time, and offer us a 100 rupee note for 83 bucks and on top of that a business who is making money and asset which accounts for almost 50% of India’s manganese ore reserve.

  • Analogy II: As said it is a cyclical business. From the first graph, it is evident that the prices are up, so do the margins(41% = un-sustainable).
    So, why do we need to buy when things are rosy and we know that this rosy picture will not sustain forever.

  1. Value buy (forever type businesses): A simple logic cyclicality of the business.
    Because of the cyclicality of the business, one can’t project the future earnings. One can argue that they can, but what they are doing is not projecting but forecasting. “Projecting is finding the reliability factors responsible for the cash flows and then estimating that future cash flow of the company. On discounting it you get the present value of the business”. First, we need is to find the factors that confirm the reliability of the cash that the company will make. The reliability factor is missing in this case.

If you look at the cash flow numbers of FY16: (Profits from operations - Taxes paid) is a negative number. So in worst times, the company may end up losing some money.
I provided enough points which tell you that it doesn’t a value buy at this price point. According to Graham first thing to look while investing is the safety of principal or you may know it as the margin of safety. Everything comes after that.

Disclaimer: Not invested

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Its trading at 4 times EV/EBITDA of its historical average EBITDA. Company has generated good EBITDA except FY16. If we assume manganese demand rises due to electric vehicle, is it not available cheap ?

4 times EV/EBITDA is cheap only when EBITDA will sustain there. I don’t think it will.
About the rising demand due to electric vehicle - I can’t buy a stock in hope that some technology will come and create huge demand for some industry. I am not a venture capitalist. And even if you want to bet on electric vehicles then you should be looking at tyre companies - If the demand rise because of replacement of old vehicles then it will be a tailwind if not then the business will grow at the same speed.

I think mining lease renewals is a big uncertainty.
Especially in the light of what is happening to NMDC.

Many mining leases of MOIL are expiring in 2020-2022 period.
Do not know whether they will be renewed or auctioned.

Can someone please through some light on this?

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MOIL just came out with its Q4 and FY20 results.
To be found here: https://www.bseindia.com/xml-data/corpfiling/AttachLive/be37614e-f219-4926-ad1d-1481c02363c7.pdf

Now, what I understand is that every listed entity needs to disclose the Cash flow statement every 6 months and definitely with its annual results. However, the cash flow statement is missing in the above result announcement.

Is my above assumption correct? If correct, then what may justify not providing a statement of cash flow.