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Sesa Goa — Setting More Realistic Targets
Sesa Goa — Setting More Realistic Targets
2QFY11 sees combination of lower realization and higher cost
While net sales was broadly in line with expectation, EBITDA during the quarter was Rs3,034mn, much lower compared with consensus estimates of Rs4,593mn (Bloomberg mean). Adjusted net profit at Rs3,485mn too was below consensus estimates, despite a minimal tax rate of 5%. Ore realisations dropped 19% QoQ to Rs3,380 per tonne from Rs4,157/t, while total operating expenses (excluding depreciation) rose from Rs1,600/t in 1Q to Rs3,046/t in 2Q, led by higher material and transport costs.
Pig iron business to the rescue … but only at the topline
The Pig Iron segment, led by better sales volume (84kt), added to the topline - segment revenue showed a 55% YoY and 46% QoQ increase. However, operating profit at Rs341mn was largely in keeping with the level of prior quarters, indicating a drop in margins.
Volume guidance of 10% in FY11 is more realistic
The management expects volume growth of ~10% this year. In earlier discussions, they had talked about 20-25% volume growth including volume from acquisitions. We believe that 10% is a more realistic guidance and maintain our forecast of 8% volume growth for FY11E (11% for FY12E).
Long-term growth rate faces hiccups
The outlook on expansion in mining capacity is more muted on account of slower regulatory approvals. Our volume forecast for FY12E (24.6mt) implies full utilization of the current mining capacity (presently 25mt).
Maintain HOLD recommendation, TP revised to Rs380
We maintain our HOLD recommendation on the stock, while rolling forward our TP for September 2011 to Rs380 (earlier Rs370 for March 2011). The TP considers the impact of the Cairn deal as well as the government’s profit sharing proposal (at 10% compared with the proposal of 26%).
While net sales was broadly in line with expectation, EBITDA during the quarter was Rs3,034mn, much lower compared with consensus estimates of Rs4,593mn (Bloomberg mean). Adjusted net profit at Rs3,485mn too was below consensus estimates, despite a minimal tax rate of 5%. Ore realisations dropped 19% QoQ to Rs3,380 per tonne from Rs4,157/t, while total operating expenses (excluding depreciation) rose from Rs1,600/t in 1Q to Rs3,046/t in 2Q, led by higher material and transport costs.
Pig iron business to the rescue … but only at the topline
The Pig Iron segment, led by better sales volume (84kt), added to the topline - segment revenue showed a 55% YoY and 46% QoQ increase. However, operating profit at Rs341mn was largely in keeping with the level of prior quarters, indicating a drop in margins.
Volume guidance of 10% in FY11 is more realistic
The management expects volume growth of ~10% this year. In earlier discussions, they had talked about 20-25% volume growth including volume from acquisitions. We believe that 10% is a more realistic guidance and maintain our forecast of 8% volume growth for FY11E (11% for FY12E).
Long-term growth rate faces hiccups
The outlook on expansion in mining capacity is more muted on account of slower regulatory approvals. Our volume forecast for FY12E (24.6mt) implies full utilization of the current mining capacity (presently 25mt).
Maintain HOLD recommendation, TP revised to Rs380
We maintain our HOLD recommendation on the stock, while rolling forward our TP for September 2011 to Rs380 (earlier Rs370 for March 2011). The TP considers the impact of the Cairn deal as well as the government’s profit sharing proposal (at 10% compared with the proposal of 26%).
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