Rich mineral, attractive pricing

The IPO of MOIL is similar to Coal India offering in many ways. MOIL, too, has got the highest rating of 5/5 from rating agency, Care Ratings, for its upcoming IPO. Its dominance in the domestic manganese industry, strong cash flows, high dividends, better return ratios, debt free balance sheet, growing demand from steel sector and huge manganese reserves are key positives. On the operating front, although its business and revenue is susceptible to the vagaries of the international manganese prices, there is a cushion as it is one of the lowest cost producers of the mineral in the world. During 2009-10, while the average manganese ore price dropped 33 per cent to Rs 7,744 per tonne, the company's operating and net profit margins stood at 62 per cent and 48 per cent, respectively, thanks to its low cost of production of Rs 2,749 per tonne.
 

ENVIABLE MARGINS
in Rs  crore	FY10	FY11E	FY12E	FY13E
Revenue	969	1350	1454	1557
PAT	466	707	785	850
EPS (Rs )	27.8	42.1	46.7	50.6
RoNW (%)	27.8	31.9	28.0	24.7
NPM (%)	48.1	52.4	54.0	54.6
EBIDTA (%)	62.1	71.4	70.7	69.7
PE (x) (at Rs  375)	13.5	8.9	8.0	7.4
PE (x) (Excl. cash)	10.3	6.1	4.8	3.8
EV/ Sales (x)	5.0	3.2	2.6	2.1
E: Analyst estimates

Good revenue visibility
India is a net importer of manganese, which is widely used in steel making, especially in stainless steel for enhancing the metal's strength. The country produces 70 million tonnes (Mt) of steel and for it 2.4 million tonnes of manganese is consumed, which is about 3-4 per cent of total steel produced. Estimates suggest that manganese consumption will continue to grow at 9-10 per cent annually over the next five years given the strong steel demand and capacity additions planned (steel production is expected to rise to 120 mt by 2012). This in turn indicates good prospects for companies like MOIL, which has about 50 per cent share of the domestic market. Notably, it has 69.5 Mt (including 21.7 mt of proved and probable reserves) of measured, indicated and inferred manganese reserves, which could last for a few decades considering the production of 1.1 Mt in 2009-10.
 

ISSUE DETAILS
Price band (Rs )	340-375
Size (Rs  cr)	1142-1260
Opens on	26-Nov
Closes on	1-Dec
CARE grading	5/5
5% discount to retail investors

Investors can thus expect a consistent growth in revenue and earnings. While these are expected to jump sharply in the current financial year due to better prices, they are estimated to grow at an average 10 per cent each in 2011-12 and 2012-13. This will be on account production growth of about 5.5 per cent annually (estimated to rise to 1.5 MT by 2014-15) and expected increase in realisations. Also , higher contribution from high grade manganese (70 per cent of production currently) will lead to better margins. The company is also exploring opportunities for acquiring mines in South Africa and other countries, which could further boost its financials.

Attractive valuations
Apart from strong business fundamentals, the IPO pricing too is reasonable and could result in good returns for investors. At the upper price band of Rs 340-375, the issue is priced at 9.5 times 2010-11 annualised earnings. The company also has cash equivalents worth Rs 1 , 762 crore (which is expected to be Rs 2 , 000 crore at the end of 2010-11) or almost Rs 105 per share. Adjusting for this, as well as the 5 per cent discount to retail investors, the valuations look very attractive. Subscribe.