Hold Sesa Goa Regulatory hurdles continue; Anand Rathi

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Sesa Goa
Regulatory hurdles continue; maintain Hold
Sesa’s results were below our estimates due to lower-thanexpected
volume and realization, and higher-than-expected
costs. We marginally prune our earnings estimate and target
price, while maintaining our Hold on the stock.

 Revenue up on higher iron-ore prices; volume down.
3QFY11 consolidated revenue grew ~20% yoy to `22.4bn, led by
higher iron ore prices. Blended iron ore realization was up 53%
yoy to ~US$87/ton. But, iron-ore volume was down 21% yoy, at
5.4m tons, due to an extended monsoon at Goa, export ban in
Karnataka and logistics constraints in Goa and Orissa.
 EBITDA below estimate. Sesa’s 3QFY11 EBITDA margin was
lower 330bps yoy, despite the higher realization due to volume degrowth
and higher costs. The higher royalty and export tax on
iron-ore impacted overall costs.
 Net profit up ~30% yoy, albeit below estimates. Net profit
was up 30% yoy to `10.6bn, largely driven by hefty iron-ore
prices. But, net profit was below our estimates due to higher-thanexpected
costs and lower-than-expected volume and realization.
 Change in earnings. We prune our earnings 6.8% and 2.2% for
FY11e and FY12e respectively, to factor in lower volume and
realization for FY11 and marginally higher-than-expected costs.
 Valuation and risks. At current market price of `330, the stock
trades at FY12e PE of 5.7x and EV/EBITDA of 5.5x. Volume
uncertainty still persists. We maintain our Hold on the stock, while
pruning our target price to `346 from `354. Key downside/upside
risk: Removal of/continued ban on iron-ore export in Karnataka.