Vinod Sharma

It is customary on New Year’s eve for analysts to come out with stock ideas that will do well in the ensuing year. While they tend to go out on a limb recommending their favourite pick, this time around the risks are higher. The impact and scale of demonetisation, an appreciating dollar and surging crude prices have only added to the uncertainty that comes with investing in the stock market. 

But uncertain times often throw up interesting bargains for investors. One such stock that could deliver a good performance over the next one year is MOIL (formerly known as Manganese Ore India). A mini-ratna public sector undertaking that made its debut in the market six years ago on December 15, 2010, MOIL is the country’s largest and globally the fifth-largest producer of manganese ore.

While the offer for sale was hugely successful, what with the issue getting over-subscribed 55 times and the stock listing on the bourses with a 50% gain over its issue price, the good news ended there. 

Over the past six years, the stock has been languishing below its offer price and it is only since November this year that the stock started gaining momentum as manganese ore prices headed north.

MOIL has reserves of 81.47 MT as per its last annual report. It has seven mines in Maharashtra and three in Madhya Pradesh with a total mining area of 1,614 hectares, as of March 31, 2016. It acquired new mining area of 988 hectares and was allotted an additional 384 hectares by the Madhya Pradesh government. While there are several other players in this space, MOIL towers over them with 50% market share and the quality of its manganese ore which commands a premium in the market place. About 95% of manganese ore is used in steel-making, directly or indirectly. India is still dependent on manganese ore imports to meet around one-third of the steel producers’ requirement.

In recent months, the government’s insistence on a minimum import price has come to the rescue of the steel industry. This has resulted in revival of many steel units across the country, which, in turn, has spurred demand for MOIL. Indian steel companies are looking to add around 11 million tonnes of additional capacity over the next two years on hopes of increased import substitution and revival in the infrastructure sector. The government is looking at boosting the country’s overall steel capacity to 300 MT by 2025. All this bodes well for the PSU. 

Apart from improving domestic demand, MOIL is also enjoying the tailwind of buoyant international prices. Manganese ore prices have continued to soar amid protracted supply interruptionsfrom South Africa and rising Chinese demand for imports from the spot market.

As a result, the price for manganese, which was at Rs.9,360 per tonne in September, was hiked to Rs.11,390 in October and Rs.14,800 in November before soaring to Rs.19,262 in December. 

With no plans to increase capacity in the near term, we expect capacity to stay constant at 1.15 million tonne in FY17 and FY18. However, from a longer term perspective, the company is working towards increasing its capacity to meet growing domestic demand. The company has planned to enhance its production to 20 lakh tonne by 2020 and 25 lakh tonne by 2030. 

Heavy metal
The company has also set up a ferro-manganese plant with a capacity of 10,000 tonne per year and electrolytic manganese dioxide plant with a capacity of 1,000 tonne per year to increase its presence in value-added products. The company has also set up a captive power plant to help reduce overall input costs, thereby, improving its margins.

Manganese ore prices are likely to hold firm or accelerate further over the next couple of quarters, following continued supply disruptions in the international markets, re-stocking by China and improved domestic demand. 

We expect the company to report an earnings per share of Rs.17 for the second half of the year and an earnings per share of Rs.23 for the whole year (FY17). Sustained volumes on rising prices should see the company post a strong growth in operating profit and earnings in FY18 as well. 

MOIL has an impeccable balance sheet with significant cash reserves. The undertaking has bought back 3.48 crore shares for Rs.863 crore as part of a buyback program. We expect the cash reserves to reach Rs.2,200 crore by March 2017, that is 38% of the company’s market cap of Rs.6,034 crore. We expect the company’s efficiency ratios to improve gradually in the coming years. The company’s asset turnover is expected to improve from 0.8 times currently to 1.5 times by FY19. Similarly, inventory days have come down from 89 to 38, while debtors days, too, have fallen from 72 to 27.

We value MOIL at 3 times estimated FY19 EV/EBITDA to arrive at a price target of Rs.442. We recommend that investors book profits if this target price is reached, irrespective of the time-frame.

The brokerage has a buy call on the stock, but the writer, in his personal capacity, does not own the stock