Visit http://indiaer.blogspot.com/ for complete details Expansion plans hit an air pocket. Sesa lowered FY2011E volume growth guidance
to 10% from 20%. In addition, the path to expansion of iron mining capacity to 50 mn
tons is also unclear on account of regulatory hurdles. We incorporate Cairn India
financials in our model, lower iron ore volumes by 13% to 21.7 mn tons and TP by 6%
to Rs320. REDUCE on (1) delay in capacity expansion plans; (2) regulatory hurdles; (3)
expensive valuations and (4) value destruction from acquisition of stake in Cairn India.
Lowers volumes growth guidance; capacity expansion may be at risk
Sesa lowered FY2011E iron ore volume growth guidance to 10% from 20% earlier citing
(1) impact on ban of iron ore exports by the Karnataka Government; and (2) continued logistics
constraints for iron ore shipments in Orissa and Goa. We believe that even the revised volume
growth guidance is dependent on the lifting of ban on iron ore exports imposed by the Karnataka
Government by November ’10. Note that Karnataka contributed to ~20% of iron ore shipments in
FY2010.
Further, Sesa’s plans to expand iron ore production capacity to 50 mn tons by end-FY2013E may
be at risk on account of delays in getting environment clearance from MOEF. Sesa currently has EC
approval to mine up to 25 mn tons per annum. Sesa indicates that the Goa Government is not
taking up any mine expansion request pending further announcements on revised MMDR draft.
Expansion of Orissa mine has also hit an air pocket. We lower our iron ore sales estimates to 21.7
mn, 24.1 mn and 29.7 mn tons for FY2011E, FY2012E and FY2013E from 25 mn, 30.5 mn and
29.7 mn earlier.
Cairn transaction may be EPS accretive but value destructive
We assume that Sesa’s open offer to acquire 20% in Cairn India at Rs355/share is fully subscribed
and consolidate earnings starting FY2012E. Note, in case of a shortfall in open offer, it will acquire
the balance shares from Vedanta at Rs405/share. Our FY2012E and FY2013E EPS estimates
increase by 11.1% and 20.2% for this consolidation. Our energy team values CAIR at Rs280/share
as compared to Rs355 paid by Sesa for the stake; this leads to value destruction of 21%.
Maintain REDUCE rating; multiple headwinds ahead
Delays in iron ore capacity expansion by the non-Big 3 miners underpin our outlook for iron ore
prices—we now model iron ore prices of US$120, US$115 and US$105/ton for FY2011E, FY2012E
and FY2013E, respectively; this partially offsets the decline in our volume assumptions. Our core
EBITDA estimates reduce by 17.2%, 2.2% and -0.6% to 53.1 bn, 55.9 bn and 60.8 bn for the
next three years. EPS estimates increase to Rs52.5, Rs54 and Rs61.5 per share on proportionate
earnings consolidation of Cairn India. We value Sesa’s core business at Rs197/share and stake in
Cairn India at Rs119/share. We lower our fair value to Rs320, from Rs340 earlier.
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