Manganese Ore: Blue Chip PSU IPO

After the blockbuster successes of the two PSU IPOs of Coal India and Power Grid, every investor is eagerly waiting for the IPO of Manganese Ore.

The Manganese Ore IPO will be made in the second half of November 2010.

The size of Manganese Ore’s IPO is about Rs. 1,000 crores and it will consist of a 20% Offer for Sale by the Central Government (10%) and the State Governments (10%). There will be no dilution of equity by issue of fresh shares which is a very good thing.

Manganese Ore’s Business

Manganese Ore is India’s largest producer of Manganese Ore and the fifth largest in the world. Manganese Ore’s total production constitutes about 50% of requirement of the country.

Manganese Ore’s reserves are about 69 million tonnes. Indian prices of manganese iron ore are slightly higher at USD 9-9.5 dmtu as compared to global prices of USD 8 dmtu. Manganese Ore’s average current selling price is about Rs 11600 per metric tonne.

Manganese Ore operates 10 mines of which six are located in Maharashtra and four in Madhya Pradesh. Manganese Ore has also entered into value addition projects, such as a Ferro Manganese Plant (10,000 TPY) at Balaghat mine and a Electrolytic Manganese Dioxide (EMD) Plant (1000 TPY) at Dongri Buzurg mine.

Manganese Ore has also diversified into renewable energy and is the first PSU in India to set up wind farm of 20 MW capacity in the Nagda / Ratedi Hills in Madhya Pradesh. It is also looking to acquire coal assets overseas.

Manganese Ore’s Financial Position

Manganese Ore is in a very sound financial position. Manganese Ore has been making profits since last 15 years and has reserves of Rs. 1509 crores. Manganese Ore is debt-free and instead has cash and bank balances in excess of Rs. 1500 crores.

Manganese Ore had a slightly poor financial position in FY 2009-10 when it reported net sales of Rs 963 crores as against Rs 1282 crores in FY09. Manganese Ore’s net profit was Rs 466 crores as compared to Rs 664 crores in FY 2008-09. Manganese Ore’s Earning before interest, depreciation, tax and amortisation (EBIDTA) margin declined at 63% versus 68% and even PAT margin slipped at 48% as against 51.7%.

Manganese Ore’s Earning Per Share (EPS) was down at Rs 27.76 from Rs 39.51 in FY09.

Manganese Ore’s CMD JK Singh told CNBC-TV18 that Manganese Ore was currently producing about 1.1 million tonne per annum and that it was planned to be increased to 1.5 million tonne by 2015-2016 at a capex of about Rs 770 crores. Importantly, it was stated that Manganese Ore would be able to maintain its EBITDA margin of close to 65% that it reported in fiscal year 2010.

On the valuation parameter, the closest competitor is Sandur Manganese & Iron Ores which is a much smaller company with a market cap of Rs. 824 crores, sales of Rs. 300 crores in FY 2010. Sandur Manganese & Iron Ores has reported good results in H1 FY 2011 with EPS spurting to Rs. 53.64 as compared to Rs. 33.34 for the entire FY 2009-10. If Sandur Manganese reports an EPS of about Rs. 100 for FY 2010-11, its PE at the CMP of Rs. 941 will be in the range of 9 to 11.

On that basis, given Manganese Ore‘s EPS for FY 2009-10 at Rs. 27.76, if the IPO is priced at a PE of 10, i.e. about Rs. 270, it will be very attractive.