Visit http://indiaer.blogspot.com/ for complete details SESA GOA 2QFY11: Below estimates; FY11 volumes and EPS cut 8% & 17%; Positive outlook for 2H
- Sesa Goa (SESA IN, Mkt Cap US$7.4b, CMP372, Buy) 2QFY11 adjusted PAT increased 110% YoY to Rs3.5b vs est. of Rs4.8b. Reported PAT of Rs3.8b included forex gains of Rs364m on outstanding FCCBs. Results are lower than expectations due to slipping average grade in sales mix, increase in freight costs and higher cost of third party mining.
Volume up 25%, but average grade slipping; thereby affecting average realization
- Iron ore sales volumes increased 25% YoY to 2m tons. Sales from Goa increased 67% YoY to 1m tons tons (including 13% YoY higher volumes of Dempo to 113,000 tons). Sesa sold more of lower grade ore from Goa. The state assembly is likely to introduce new legislation to curb illegal mining in the state. Though Sesa’s mines are legal, the increased procedural requirement have increased the intensity of operation management thereby affecting volume growth.
- Volumes from Karnataka remained flat YoY at 0.5m tons despite imposition of export ban by state during the quarter. Export ban by Karnataka, still in force, is expected to get lifted by end of this month as a favorable verdict is expected from High Court since all hearings of case have been completed. The FOB costs were ~US$40/ton.
- Volumes from Orissa too remained flat YoY at 0.5m tons. The long term agreement with 3rd party is still due for renewal. In the meantime, the price paid for mining iron ore from these 3rd party mines has increased ~2x to Rs2000/ton. The procedural & logistic difficulties and pending renewal of long term agreement will continue to restrict volumes from Orissa. The FOB cost from Orissa mines were US$92/ton.
- Average iron ore realization increased 43% YoY to Rs3528 (US$76/ton) due to 56% increase in spot price, though larger share of lower grade ore in sales mix was a drag.
Cost increased due to higher railways freight and higher costs of 3rd party ore
- Iron ore costs have gone up due to increase in royalty, export duty, railway freight, and price paid for mined ore on 3rd party mines. Railways freight has increased by nearly US$20/ton during March 2010 and June 2010.
- Other income too was lower than our estimates because the liquid funds have been moved in FMP (fixed maturity plan debt schemes). Accounting standed does not allow mark to market gains to be booked in P&L. This, however, will be compensated in the subsequent quarters.
- Tax rate guidance for the year has been lowered to 15-16% due to lower margins from Orissa mines, which pay full tax. Mines at Goa and Karnataka are benefiting from tax exemptions due to EoU status.
Volume growth guidance lowerd to 10% (vs 20-25%) for FY11; cutting volumes
- Sesa Goa continues to aim to increase volumes to 50mtpa and is taking steps to increase mining and logistic capacities. However, the procedure delays in getting statutory clearances to expand offtake is posing serious challenges. In pursuit to curb illegal minnig across the country, there is virtual freeze on amending mining leases for higher off-take.
- Management has lowered the volume guidance to 10% growth vs earlier guidance of 20-25% due to various procedural challenges. As a result, we are cutting FY11 volumes by 8% to 23.8m tons.
Cutting FY11 EPS 17% to factor lower volumes and cost pressure; Positive outlook for 2H; Maintain Buy
- We are cutting FY11 EPS by 17% to Rs52.4 to model 8% lower volumes and FY12 EPS by 24% to Rs52.5 to model 17% lower volumes.
- Iron ore prices are hovering around US$150-160/ton on Cfr China basis for 63.5% Fe Indian iron ore against average of US$145/ton during 2QFY11. Nearly 69% of FY11 volumes are expected in 2H. Stronger pricing environment and significantly higher volumes augur well for 2HFY11.
- Cairn acquisition will add ~Rs9b to FY12 PAT i.e. EPS accretion of 18-20%, subject to completion of the deal.
- Sesa trades at a FY11 / FY12 PE of 7.1x, FY11 EV/EBITDA of 4.5x and FY12 EV/EBITDA of 3.2x. Maintain Buy
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