MOIL is a Schedule “A” Miniratna Category-I company engaged in the exploration, exploitation and marketing of manganese ore and products, such as electrolytic manganese dioxide and high carbon Ferro manganese alloy. MOIL Ltd. is India’s largest manganese ore producer with ~45% share and production of 1.28 million tonnes in FY20. MOIL business is cyclical in nature and directly correlated with the steel production. India has become world’s second largest steel producing country after China with crude steel production of 111.2 million tonnes in 2019. Going forward, we believe steel demand could improve on the back of revival in the economy post COVID-19, Government’s continuous thrust on infrastructure development, revival in the capex cycle etc. Manganese ore prices in the international market has dropped from $6/dmu to sub $4/dmu. However, management believes that the bottom has been hit in terms of pricing and expects reversal from here. It has in the past fallen to as low as $3/dmu before a supply response by way of production cuts/mine closures were implemented to control the slide in the prices. Price cuts of 10%/15% respectively in July and August'20 could lead to a sequential decrease in Q2FY21 realizations. International manganese ore prices have recently recovered ~5% from recent lows and management expects that prices have bottomed out.
Valuations & Recommendation:
MOIL is the largest producer of manganese ore in India with almost 45% share. Moil is debt free company with cash and equivalents at ~50% of its current market capitalization, which provides margin of safety going forward. In long term, Moil is envisaging production target of 2.5 million tonnes by 2025 and 3 million tonnes by 2030 which will further help in consolidating its leadership and also in line with the increase in the production of steel in the country. The expansion plans of the company may be delayed by a few quarters due to the pandemic. Manganese ore prices in the international market are likely to hit the bottom around sub $4/dmu. Going forward we believe manganese ore prices are likely to improve on the back of improvement in steel demand. The current price displays inexpensive valuations and cash rich balance sheet also provides margin of safety. Also attractive dividend yield of ~4% is another attraction. The stock is trading at attractive valuation of 3.5x FY22E EV/EBITDA. We feel that investors can buy the stock on dips to Rs.137-141 band (2.7xFY22E EV/EBITDA) & add more on dips to Rs. 125-129 band (2.0xFY22E EV/EBITDA) for base case target of Rs.171 (4.5xFY22E EV/EBITDA) & Bull case target of Rs.187 (5.4xFY22E EV/EBITDA) Historically the mean one year forward EV/EBITDA has been around 4.4x.
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