MOIL. IPO NOTE 25 November, 2010 SECTOR: MINING SUBSCRIBE. Valuation

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1 IPO NOTE 25 November, 2010 MOIL SECTOR: MINING SUBSCRIBE Issue Snapshot Issue Period Nov 26 - Dec 1, 2010 Price Band (Rs)* Issue Size (Rs Mn) 11, ,371.3 Market Cap (Rs Mn) 57,120-63,000 Issue Size (No. of Shares) 33,600,000 Employee Reservation 672,000 Net Issue of Shares 32,928,000 QIB 16,464,000 Non-Institutional 4,939,200 Retail 11,524,800 MOIL is a state owned company engaged in the business of mining manganese ore for over four decades. It is a leader in the domestic market accounting for 50% of the total production. The company has been conferred the Mini Ratna Category I status by the government. The company also operates two wind power plants with a total capacity of 20MW. Investment Rationale MOIL is the largest manganese ore producer in the country contributing 50% to the total production. In FY10, it produced ~1.1mn tonnes of manganese ore. Face Value (Rs) 10.0 Book Value as of H1FY11 (Rs) Capital Structure: Pre Issue Equity (Rs Mn) 1,680.0 Post Issue Equity (Rs Mn) 1,680.0 *Retail Investors will get 5% discount Shareholding Pattern Pre Issue (%) Post Issue (%) Promoter (Central/State Govt.) Public Total Total Shares 168,000, ,000,000 The company has 21.7mn tonnes of proved reserves of which 55.0% are of medium to higher grade. It does not have any reserves with manganese content below 30%. Domestic steel capacity is expected to double by 2012, translating to demand for 4.2mn tonnes of manganese ore. The company is expanding its production facilities by 465,000MT at a capital outlay of Rs 7,500mn. These facilities are expected to come online in phases by Website: As a part of MOIL s strategy to integrate forwards it has entered into a JV with SAIL and Rashtriya Ispat Nigam to manufacture ferro manganese and silico manganese. Valuation At the upper band of Rs 375, the issue is available at a P/E of 9.5x based on annualised H1FY11 EPS of Rs The company's international peers are also trading in the P/E range of x. Given the company's leadership position in India and huge growth prospects of the manganese ore industry augur well for the company. At current levels the issue is attractively valued and we recommend SUBSCRIBE.

2 Investment Rationale Largest producer of Manganese ore in India As per IBM, MOIL is the largest producer of manganese ore in the country, accounting for more than 50% of the total production. During FY09, the industry produced 2.2mn tonnes of which MOIL contributed 1.2mn tonnes More than 50% reserves in medium to higher grade As per USGS, the company holds 17.0% of the proved reserves in India as of Based on the JORC code, the company has access to 21.7mn tonnes of proved and probable reserves and 69.5mn tonnes of measured, indicated and inferred mineral resources as of October, More than 50% of the company's proved reserves are of medium to higher grade and it does not have reserves containing less than 30.0% manganese content. manganese ore. According to the Indian Steel Ministry, India was the 5 th largest producer of steel in 2009 and is expected to become the second largest by It is expected that the crude steel capacity in India will almost double to 124.0mn tonnes by from the current 66.3mn tonnes. In India, steel consumption has almost doubled from 31.0mn tonnes in FY02 to 59.4mn tonnes in FY10 registering a CAGR of 8.5%. During the same period domestic steel production grew at a CAGR of 11.1% from 28.0mn tonnes to 65.0mn tonnes. CARE research expects that the domestic steel demand will grow at a faster rate of 9.1% (long product 9.0%, flat products 9.5%) from 59.4mn tonnes in FY10 to 92.0mn tonnes by FY15. Domestic Steel Demand (MnT) 100 Manganese Ore Production (MT) % % 20 0 FY10 FY11 FY12 FY13 FY14 FY % Source: CARE, SPA Research Source: USGS, SPA Research >40% 36-40% 36-30% Steel Sector The demand driver Steel sector accounts for a lion s share in the total manganese demand. More than 90% of the ore is used as a feedstock in manufacturing Ferro Alloys. The demand for manganese is therefore depended on the demand for steel and moves in tandem with the cyclicality of the steel industry. From CY02 to CY08, the global steel demand increased at a CAGR of 8.0% thereby fuelling the demand for The demand for manganese ore is expected to grow in line with the demand for at a CAGR of 9.1% to reach 4.1mn tonnes by FY12. We believe MOIL will continue to have 50% share in this industry. This reverberates to ~2.0mn tonnes of manganese capacity. In FY10, MOIL produced ~1.0mn tonnes and thus has a significant room to expand and ramp up its production. Expansion Plans MOIL has 8 projects lined up till 2016 with an outlay of more than Rs 7,500mn. The company is undertaking expansion at 5 of its existing mines in order to increase their production from 835,000MT to 1,295,000MT at a

3 cost of Rs 5,648.3mn which are expected to be commissioned in phases by It is also building a township near its mines to provide the infrastructure support at a cost of Rs 2,030.0mn and is expected tp be completed by FY15. Growth in Ferro Alloy Industry According to the National Steel Policy, 2005, projected steel production is likely to be doubled by The expected increase in demand will push the demand for quality manganese ore. The current ferro alloy capacity in India is 4.0mtpa and the production was ~2.35tonnes in FY10. Moving forward in the Value Chain MOIL has entered into JV agreement with SAIL and Rashtriya Ispat Nigam Ltd. to setup ferro alloy plants in Chhattisgarh and Andhra Pradesh respectively. The company entered into a 50:50 JV agreement with SAIL to manufacture 31,000MT of ferro manganese and 75,000MT of silico manganese in The capital outlay for the project is Rs 3,920mn. In 2009, the company entered into a 50:50 JV agreement with Rashtriya Ispat Nigam Ltd. to manufacture 20,000MT of ferro manganese and 37,500MT of silico manganese. The capital outlay for the project is Rs 2,061.9mn. The company is expected to garner a large share of the value chain from the sale of these value added products. Strong Realizations MOIL is one of the lowest cost producer in the world. The company's product portfolio consists of manganese ore, Electrolytic Manganese Dioxide, High Carbon Ferro Manganese and Ferro Manganese slag. Manganese ore forms ~90.0% of its total revenues. The company witnessed a dip in its realisations in FY10 due to weak outlook for the steel sector. However, since then the realisations have grown by 51.2%. Manganese Ore Realization (Rs) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY06 FY07 FY08 FY09 FY10 H1FY11 Source: Company, SPA Research With robust demand for steel in the domestic and global markets we believe the price for manganese ore will remain firm. Strategic location of mines All of company's mines are located in the central part of India thereby providing marketing and logistic advantage over other companies. Increase in Reserves To maintain its leadership position the company is active int the exploration and development activities to increase the proved ore reserves. The Ministry of Mines has reserved hectares of land for MOIL in the state of Maharashtra. The company has already applied for the prospective licenses in this regard.

4 Company Background MOIL was incorporated in 1962 as a public limited company and is engaged in the business of mining manganese ore. The company has more than four decades of experience in mining. As per IBM Yearbook, 2008, the company is the largest producer of manganese ore in India. MOIL was inferred the Mini Ratna Category I status in 2008, giving the company financial independence to the tune of Rs 5,000mn. The company operates through 10 mines, of which 3 are opencast and 7 are underground. Six of these are located in Nagpur and Bhandara districts of Maharashtra and four are located in Balaghat distric of Madhya Pradesh. The company produced ~1.1mn tonnes of ore in FY10. MOIL Production 64.1% Underground Source: Company, SPA Research 35.9% Open Cast Mines Grade Proved Probable Total Balaghat 40% Dongri Buzurg 42% Chikla 36% Tirodi 32% Kandri 38% Beldongri 30% Ukwa 38% Munsar 32% Gumgaon 36% Sitapore/Sukli 32%/30% Dumps Total Source: Company, SPA Research, Reserves in Mn. Tonnes Mines Measured Indicated Inferred Total Balaghat Dongri Buzurg Chikla Tirodi Kandri Beldongri Ukwa Munsar Gumgaon Sitapore/Sukli Dumps Total Source: Company, SPA Research, Reserves in Mn. Tonnes Based on the JORC code, the company has access to 21.7mn tonnes of proved and probable reserves and 69.5mn tonnes of measured, indicated and inferred mineral resources as of October, Captive Power MOIL operates two wind farms in the state of Madhya Pradesh with an aggregate capacity of 20MW. Of this 15.2MW is sold to the Madhya Pradesh Power Trading Company.

5 Investment Concern Pricing The realizations of manganese ore are depended on the vagaries of the steel industry. Any downturn in the steel sector can affect the manganese ore realizations. Objects of the Issue The CIL initial public offering is a part of the government s disinvestment strategy. The Central Government and State Governments of Maharashtra and Madhya Pradesh are the selling shareholders and are offering 10%, 5% and 5% of the total no. of shares (33.6mn shares) for sale at a price band of Rs /share. Valuation At the upper band of Rs 375, the issue is available at a P/E of 9.5x based on annualised H1FY11 EPS of Rs The company doesn t have any strict comparables in the domestic space. Its international peers are also trading in the P/E range of x. Given the company's leadership position in India and huge growth prospects of the manganese ore industry augur well for the company. At current levels the issue is attractively valued and we recommend SUBSCRIBE.

6 Industry Overview Manganese Manganese is the fourth most metal used after iron, aluminium and copper. Manganese as an ore and as an alloy finds its applications in industries such as steel, portable batteries, aluminium beverage cans and water purification. Manganese and Steel Sector More than 90% of the world s production of manganese is used in desulphurization and strengthening of steel. Manganese ore is smelted to form ferro-alloys such as ferro manganese and silico manganese which are used in steel alloying applications. Demand for manganese is therefore depended on the demand for steel and is exposed to the vagaries of the steel sector. Grade Production Application High to Medium Medium to Low Low Ferro Manganese Silico Manganese Blast Furnace Normal and High Carbon Steel Deoxidization and Alloying agent Stainless Steel, Heat Resistance Steel and Electric Welding Electrodes Manganese Ore Reserves As per United States Geological Survey, land based total manganese reserves as of 2009 are placed at 5,200mn tonnes. Country MnT % South Africa 4,000 77% Ukraine % Australia 160 3% India 150 3% China 100 2% Gabon 90 2% Others 180 3% Total 5, % In India, the total manganese resources are pegged at 378.6mn tonnes, of which 150mn tonnes fall under the proved category. As per the Indian Bureau of Mines, ferro manganese grade accounts for only 7%, silico manganese grade 8%, Blast Furnace grade 34% and the remaining 51% are of mixed, low and not known grades. Orissa tops the total resources list followed by Karnataka and Madhya Pradesh. State MnT % Orissa % Karnataka 83 22% Madhya Pradesh 61 16% Maharashtra 30 8% Goa 19 5% Andhra Pradesh 15 4% Others 19 5% Total % Source: RHP, SPA Research Global Production From , the global manganese ore production grew by 5.7% annually from 11,934MT to 13,330MT. However, in 2009 due to global financial meltdown, production declined by 27.5% to 9,664MT. Manganese Ore Production (MT) 14,000 12,000 10,000 8,000 6,000 4,000 2, Australia China Gabon India South Africa Others Source: USGS, SPA Research Source: RHP, SPA Research

7 Financials Income Statement Rs Mn FY09 FY10 H1FY11 Income from Operations 14, , ,924.9 Operating Expenditure 4, , ,844.1 EBIDTA 10, , ,080.9 EBIDTA Margin 71.7% 67.3% 73.4% Depreciation & Impairment Profit Before Tax 10, , ,947.8 Tax 3, , ,640.5 PAT 6, , ,307.2 Adjustment for Restatement (7.3) 7.7 PAT (Restated) 6, , ,315.0 PAT Margin 48.0% 42.8% 47.9% Balance Sheet Rs Mn FY09 FY10 H1FY11 Equity Share Capital , ,680.0 Reserves & Surplus 12, , ,402.1 Networth 13, , ,082.1 Deferred Tax Liability Total Liabilities 13, , ,189.9 Gross Block 3, , ,802.2 Less: Depreciation 1, , ,738.0 Add: CWIP Net Fixed Assets 2, , ,289.4 Ivestments Current Assets 14, , ,891.9 Current Liabilities 3, , ,013.6 Net Current Assets 11, , ,878.4 Total Assets 13, , ,189.9 Cash Flow Statement Rs Mn FY09 FY10 H1FY11 Cash flow from Operations 9, , ,502.2 Cash from Working Capital (2,466.0) (3,409.0) (2,079.3) Net Cash Flow from Operating 7, , ,422.9 Net Cash Flow From Investing , Net Cash Flow From Financing (1,556.0) (1,098.5) - Net Cash Flow (A+B+C) 6, , ,757.8 Opening Cash 6, , ,871.0 Closing Cash 12, , ,628.8 Ratios (x) FY09 FY10 H1FY11 EBIDTA Margin 71.7% 67.3% 73.4% PAT Margin 48.0% 42.8% 47.9% RoE 52.3% 27.8% 33.0% BV/Share EPS # *EPS is on an annualised basis, Pre Issue Figures Peer Comparison Company Currency CMP (Rs) EPS (Rs) P/E (x) 340 INR INR Vale USD BHP Billiton AUD ENRC GBP Sandur Manganese & Iron Ore INR Source: Bloomberg

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