Inventory valuation leads to EBITDA miss

* MOIL’s Q2 numbers were significantly lower than estimates, dragged down by inventory valuation adjustment of Rs1.1bn. As per management, inventory is valued on cost or Net Realizable Value (NRV), whichever is lower. We await details pertaining to the same.

* Shaft sinking at Balaghat and Gumgaon mines is delayed by 6-8 months due to lockdowns and travel restrictions. Chinese experts, who were to assist in this matter, are not expected to return anytime soon. We had factored in significant delays previously in our estimates.

* Major growth capex now shifts to FY22 (from FY21) and the benefits are pushed beyond FY23. However, with 50% of the balance sheet in Cash and 58% of market cap in cash, we see limited downside from current levels.

* Revival in steel production should push demand for Mn ore. However, we cut FY22/23E EBITDA by 12%/11%, reflecting weak pricing environment. Inexpensive valuation at 3.6x FY22 EV/EBITDA and cash of Rs78/sh support Hold rating. We reduce TP to Rs145 (from Rs163). Key risk is significant movement in Mn Ore price.

Inventory valuation remains unexplained: Since the production has been lower in Q1 and Q2 compared to the normalized run rate, the overall fixed cost has resulted in a higher cost of inventory, compared to the normalized cost of Rs6500/t. This has resulted in an abnormally higher charge to the inventory. We note that in Q1, despite an inventory liquidation of about 20kt, there was an overall accretion of Rs591mn to Mn ore inventory. Large swings in two quarters have resulted in wide distortions in overall results of the company. We believe that management should publish additional disclosures on a regular basis to bring clarity on the valuation of inventory.

Outlook and valuation: While the stock remains inexpensive at 3.6x FY22E EV/EBITDA valuation, it is important to note that the delay in mining projects further delays the big volume growth expected in FY23 by management, though never factored in our numbers. We believe that the doubling of capacity from 1.25 to 2.5mt will happen post FY25/26. High port stocks in China will further restrict the pricing upside in the near term. As a result, despite an attractive valuation at 3.6xFY22E, we rate the stock as Hold. We keenly await management’s clarification on inventory valuation and watch out for any plans to compress the capex timelines.

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