MOIL (Manganese Ore India Limited). The future is near

1 INR = 0.013 USD-

1 USD = 74.15 INR

MOIL (Manganese Ore India Limited) is a state-owned manganese ore mining company with a market cap of ₹3200 crores (USD$431.5 million) and a current market price of ₹180 (USD$2.42) per share.

The business case

Crash course on Manganese (Mn)—Mainly it turns iron into Steel (and Does So Much More). Non metallurgical uses of Mn are in battery cathodes, soft ferrites used in electronics, micronutrients for fertilizers and animal feed, water treatment chemicals, for automobile undercoat paints, bricks, frits, glass, textiles, and tiles. “Manganese violet” is used for the coloration of plastics, powder coatings, artist glazes, and cosmetics. In the new world order of electric vehicles, manganese is one of the key elements along with Lithium, Nickel, Cobalt and Graphite.
South Africa, Ukraine and Brazil have the highest manganese reserves, but other countries holding significant manganese reserves are Australia (91 million MT and India (52 million MT)
In 2019 India became the second largest importer of Manganese ore after China. There is a clear demand for the product compared to the supply at hand.
India produced 2.1 million MT of manganese in 2021 and 1.1 million MT (50%) was produced by MOIL India. Currently the company controls 40% of all manganese reserves in India.
The Indian government has directed MOIL to increase capacity. MOIL’s current production of 1.1 million MT in 2022, it plans to increase it to 1.8 million MT by 2024 and 3.5 million MT by 2029.

The market perception

Most investors look at Public Sector Enterprise (PSE) securities with a negative view. This is because, Indian PSEs are known to be reckless inefficient capital allocators. The view gets enhanced when investors glance at yearly price charts and see the slow movement of the stock price, a common matrix used to evaluate performance.

Our view on the stock

Our investment in MOIL dates back from 2015 when we started purchasing the stock at an adjusted price of ₹116 per share. Glancing at the returns, one may feel that a price movement from ₹116 per share to ₹180 per share over 6 years is a measly 7.5% yearly compounded gain, but let’s look closely. When we see their dividend record, they pay investors twice a year and the combined total dividend since 2015 till date is ₹52.40 (0.64) per share.

Additionally, the company conducted two buybacks, in 2018 and 2021 allowing existing investors to tender their stock at almost 20% more than the market price. We at SSPL decided to tender part of our holdings and use the proceeds to repurchase their stock from the open market, inturn increasing our ownership in the company.

Putting everything together; MOIL’s “Price appreciation” + “Dividends” + “Gains from buybacks” + “Gains from dividends reinvested”, long term investors should be reasonably pleased with their high teen compounded yearly returns.

Our investors would be pleased to know that as of Mar 2022 we purchased more shares from the open market.

How do we see the future?

We believe by 2029 MOIL will have significant increase in Sales and net profits. Our view is that the company’s Net profits will increase more than 7X from its existing FY 21 profits of 248 crores (USD $33.44 million). Let’s look at some triggers

Price increase: Volatility in international markets has been high for manganese prices. India & China have been and will continue being the highest importers of the product. Traditionally global manganese was used for making Steel and industrial use, but recently Electric vehicles and Batteries have increased the demand for various grades of manganese ore. We firmly believe, the per metric ton prices for high & low grade manganese will increase. Though MOIL pairs its prices to a marginal discount from the international market, it will pass on the price increase to its local customers, due to higher international prices.
MOIL has always maintained more than 25% of net profit margins, consistently in the last decade and we see it continuing the current decade too. The company has the ability to pass on price increases to its customers with ease and keep maintaining higher margins.
New market in high grade Mn: Traditionally MOIL has been mining low grade manganese for industrial use. The company plans to invest and produce high grade manganese, that would be used for batteries & Electric Vehicles. This would result in higher margins and a premium segment for high grade manganese.
MOIL & GMDC: MOIL had recently signed Memorandum of Understanding (MoU) with Gujarat Mineral Development Corporation (GMDC), for joint exploration of manganese bearing areas, to conduct mining operations in Indian state of Gujarat. We as investors see it as; “Two monopoly PSEs coming together to create one giant monopoly”.
Finally a Monopoly miner: Currently MOIL has 11 mines in India with a virtual monopoly. As mining licenses are granted for a duration of 20-50 years, your competition comes when
1. If other miners are granted licenses. That hasn’t happened!
2. Or the industry finds a replacement for manganese ore to make steel & batteries.

SWOT analysis

Strengths	Weaknesses
· MOIL has an 80% Government holding · High net margins + Cashflows+ Good dividend pay-out compared to market share price · Due to the high cash flows and accumulating reserves, they have done 2 buybacks since their IPO in 2011. · The company has little option to make use of their high cash flow, hence pay out high dividends and do buybacks	· As the government holds majority stake, they lick the lion’s share of company’s taxes and royalties, apart from appointing Directors whom they deem fit. · In the past, on the pretext of “nation building” and “Needs of the nation”, the company has made large donations from its cash reserves(which belongs to shareholders) to Prime minister & Chief ministers relief funds. · Large cash reserve can lead to misallocation of capital.
Opportunities	Threats
· Disinvestment candidate · High cashflow and reserves result in returning Dividends and buybacks to shareholders · Plan to produce high grade manganese for batteries and EVs. · Agreement with GMDC to mine manganese in Gujarat. Further scope of adding more mines to their current operations of 11 mines.	· Tendency of the Indian state to use cash rich PSEs like MOIL as its private piggy bank. · Indian Government is slowly opening the mining industry and granting private companies licenses. MOIL’s operations could cause disruption if their mining licenses undergo any renewals. · Lobbying from unlisted private entities make lease renewal process opaque and untransparent

Valuation highlights

Enterprise Value post FY 22 buyback: ₹3200 crores (USD$431.5 million)

Stock price: ₹180 (USD $2.42)per share

Cash on book post buyback: ₹1400 crores (USD 188.80 million)

Almost 44% of the MOIL’s market cap is cash on book

Debt: Zero

Price to book: 1.4

PE: 11.9