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Negative news continues…
The performance of Sesa Goa could be impacted by the closure of its
Thakurani mines in Orissa and regulatory concerns in Karnataka. We
expect a dip in sales volumes for FY11 followed by marginal
improvement in FY12. The management had earlier reduced its volume
growth guidance for FY11 to ~10% from ~25%. However, we believe
volumes will de-grow ~13% with marginal ~4% growth in FY12
Considering the above events, viz. i) ban on iron ore exports by
Karnataka, ii) closure of Orissa mines iii) depletion of cash reserves due
to Cairn India acquisition and iv) 26% profit sharing with locals have led
us to revise downwards our FY11E and FY12E EPS estimates to | 45.4
and | 38.5, respectively. We maintain our REDUCE rating on the stock
with a price target of | 282/share.
Closure of Thakurani mine to impact operational performance
The company was unable to renew its third-party mining contract
for the Thakurani mines in Orissa, thereby leading to closure of
mining operations. In 1999, Sesa Goa had entered into a 10 years
mining agreement with mine leaseholder, which ended in June
2009. However, it entered into short-term contracts till further
negotiations on the long-term agreement was settled. Still, these
talks have not materialised and the company has decided to
conclude the agreement with effect from December 1, 2010.
Volume growth impacted
Orissa mine has reserves of ~69 million tonnes (MT) and had
reported sales volume of ~ 1.9 MT in FY10. The management had
plans to achieve production of ~ 50 MT by FY13 aided by ~10 MT
of contribution from Orissa. We estimate a drop in sales volume to
~ 17.7 MT and 18.4 MT in FY11 and FY12, respectively.
Valuation
At the CMP of | 303, the stock is trading at 4.8x and 5.1x its FY11E and
FY12E EV/EBITDA, respectively. On a P/E basis, the stock is discounting
its FY11E and FY12E EPS by 7.7x and 9x, respectively. We maintain our
REDUCE rating on the stock with a target price of | 282/ share.
Outlook & earnings revision
Iron ore prices have surged up sharply of late but are likely to face some
pressure from Q3FY11 onwards. This could be attributed to concerns on
a slowdown in the Chinese steel industry. Recently, China has taken
certain steps to cool off its overheating economy especially the property
market and also closure of fragmented steel mills due to energy efficiency
targets. This has a direct link to steel demand. Thus, the sentiment got
hurt to some extent. The fragile nature of the economic recovery in most
of the developed nations has also been raising concerns on the
sustainable demand for steel. We believe these concerns would continue
to put pressure on the prices of iron ore in the medium-term.
Orissa mine closure will impact the volume growth based on production
target of ~10 MT by FY13. Back home in the domestic market, issues on
environmental clearances, logistical bottlenecks, illegal mining and
possible proposal of profit sharing with locals in the new upcoming
mining bill have been looming large on major players especially Sesa
Goa. Also, a delay in getting environmental licenses and renewal of
mining lease has been raising questions on the ability of the company to
increase its volume.
Considering the above events, we have revised down our estimates of
sales volume for FY11E and FY12E. We expect sales volumes of 17.7 MT
in FY11E and 18.4 MT in FY12E. The dip in sales volume has resulted in a
downward revision of EPS estimates for FY11E and FY12E to | 45.4 and |
38.5, respectively.
Valuations
Ongoing concerns on a ban on iron ore exports by Karnataka coupled
with closure of Orissa mines and lower volume guidance of ~10% on an
annualised basis would impact the performance of the company, going
forward. Also, a possible proposal of profit sharing with locals along with
demand moderation in China due to monetary tightening measures can
impact the bottomline of the company.
At the CMP of | 303, the stock is trading at 4.8x and 5.1x its FY11E and
FY12E EV/EBITDA, respectively. On a P/E basis, the stock is discounting
its FY11E and FY12E EPS by 7.7x and 9x, respectively. We maintain our
REDUCE rating on the stock with a target price of | 282/share.
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