Visit http://indiaer.blogspot.com/ for complete details EBITDA and PAT ~25% and 16% below expectations
Sesa Goa reported revenue of INR 9.2 bn in Q2FY11, ~8% lower than our
expectation of ~INR 10 bn. Sales volume was in line at 2 mt (up 24% Y-o-Y) but
blended realisation came in lower at USD 76.5/t (our estimate: USD 80/t). Iron
ore cash costs shot up to USD 49/t (from USD 36/t in Q2FY10) led by increase in
cost of purchased ore, spares and USD 20/t increase in freight cost at Orissa and
Karnataka since March 2010. PAT, thus, came in 16% lower at INR 3.85 bn.
FY11 volume growth guidance cut to 10% from earlier 20-25%
The company is facing headwinds of the iron ore export ban in Karnataka and
logistics challenges in Orissa. Management indicated volume loss of ~1 mt in
Q2FY11 due to the Karnataka export ban. Assuming the ban is reversed by next
month, management now expects 10% volume growth in FY11 against earlier
guidance of 20-25% growth (our assumption: 17%). No guidance has been
given for FY12. Continuing ban in Karnataka will entail flat volumes for FY11.
Deteriorating product mix and lower other income impact profits
The discount of Sesa Goa’s blended iron ore realizations to benchmark prices (63
Fe) has widened from 31% in Q2FY10 to ~40% in Q2FY11 reflecting lower
grades in the product mix. Other income for Q2FY11 fell ~35% Q-o-Q, though
cash declined only 5% Q-o-Q.
Cairn India open offer awaiting SEBI clearance
Sesa Goa’s acquisition of 20% stake in Cairn India through an open offer is still
awaiting SEBI clearance. The company has increased its borrowing limit to INR
150 bn. As expected, the debt is for the Cairn India transaction, but the high
amount is a surprise.
Outlook and valuations: Volume growth stutters; maintain ‘REDUCE’
We have cut our FY11 and FY12 volume growth assumptions for Sesa Goa to
22.5 mt (earlier 24 mt) and 25.8 mt (earlier 28.8 mt), respectively. After
factoring in higher costs but with better-than-expected iron ore prices, we cut
our FY11 and FY12 EBITDA estimates by 7% and 13%, respectively. Our fair
valuation works out to INR 339/share, a downside of 6% from CMP. We maintain
‘REDUCE/Sector Underperformer’ recommendation/rating on the stock.
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