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Lack of growth prospects ahead…….
Sesa Goa’s Q3FY11 results came in below our estimates. Net sales grew
~19% YoY at | 2250 crore against our estimate of | 2385 crore. Sales
volumes have posted a robust growth of 181% QoQ whereas YoY it
grew 19% to 5.3 million tonnes (MT). EBITDA grew 263% QoQ and 19%
YoY to ~| 1233 crore, mainly on account of higher realisations. As a
result, PAT also improved ~175% QoQ to ~| 1065 crore, against our
estimates at | 1292 crore. However, concerns like i) ban on iron ore
exports by Karnataka, ii) logistical bottlenecks in Goa and iii) proposed
mining policy of 26% profit sharing with locals by mining companies
have led us to revise our FY11E and FY12E EPS estimates to | 43.7 and |
38.4, respectively. We have revised our target price on the stock to |
319/share and assigned a REDUCE rating.
ƒ Higher realisations boost performance
Blended realisation for Q3FY11 stood at ~| 4181/tonne as compared
to our estimates at | 3872/tonne. Realisations have improved by
50% compared to Q3FY10. Globally, iron ore prices have firmed up
on the back of strong demand. This has led to improvement in the
price realisation of the company.
ƒ Volume de-growth disappoints
Total iron ore volume declined ~21% YoY to 5.38 MT. This was
mainly on account of closure of its Thakurani mine in Orissa, where
the company failed to renew its long-term agreement with the
miner. Also, volumes at Goa operations were impacted due to
extended monsoons and logistics issues.
Valuation
At the CMP of | 324, the company is trading at 5x and 5.2x its
FY11E and FY12E EV/EBITDA, respectively. We have valued the
stock at 3.5x its FY12E EV/EBITDA. Hence, we have arrived at our
target price of | 319/ share and assigned a REDUCE rating.
Result Analysis
The Q3FY11 performance was healthy backed by improved realisations
and decent volume offtake. Dempo has registered volume growth of
~41% QoQ. EBITDA margins registered a healthy growth of ~ 1779 bps
QoQ due to robust realisations at ~| 4181/tonne. However, going ahead,
volume growth is expected to be muted due to the existing ban in
Karnataka and closure of third-party mine in Orissa. In Q4FY11, we expect
sales volumes to be higher on the back of higher demand and liquidation
of inventory at the Orissa mine. Also, lack of clarity from the government
regarding the Cairn India stake sale has led to some confusion about the
usage of existing cash and cash equivalent reserves of ~| 8229 crore for
expansion purposes ahead.
Global iron prices continued to trade higher in Q3FY11 backed by higher
demand globally and also due to supply side disruption due to recent
floods in Queensland region in Australia. The contract prices were settled
at US$125/ tonne for Q3 and are further likely to be revised upwards due
to the ongoing spurt in iron ore prices due to supply side disruption from
Australia. Spot prices (63.5% Fe) are trading at ~ US$180/tonne CIF.
Going ahead, we may see a further upward bias due to upward revision in
contractual prices by global mining majors.
Outlook & earnings revision
Iron ore prices have surged up sharply of late but are likely to face some
pressure from Q1FY12 onwards based on the commencement of mining
operations at Australia as some normalcy is expected to restore the preflood level volume offtake from the region. 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 the steel demand and, thus, this will
impact the overall demand globally. The fragile nature of 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 prices of iron ore in the medium term.
Back home in the domestic markets, 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, delay in getting
environmental licenses and renewal of mining lease have been raising
questions on the ability of the company to increase its volume.
We have not revised our volume estimates of 17.7 MT in FY11E and 18.4
MT in FY12E. On the realisation front, we have revised our average
realisations upwards to | 3910/tonne in FY11E and expect realisations of
~| 3881/ tonne in FY12E based on the improved realisation levels as seen
lately. The changes in sales volume and realisation have resulted in an
upward revision of EPS estimates for FY12E to | 45.4
Ongoing concerns on a ban on iron ore exports by Karnataka and closure
of Orissa mines 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 | 324, the company is trading at 5x and 5.2x its FY11E and
FY12E EV/ EBITDA respectively. On a PE basis, the stock is discounting its
FY11E and FY12E EPS by 8x and 9.1x, respectively. We have maintained
our target price on the stock at | 319/ share and assigned a REDUCE
rating.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Lack of growth prospects ahead…….
Sesa Goa’s Q3FY11 results came in below our estimates. Net sales grew
~19% YoY at | 2250 crore against our estimate of | 2385 crore. Sales
volumes have posted a robust growth of 181% QoQ whereas YoY it
grew 19% to 5.3 million tonnes (MT). EBITDA grew 263% QoQ and 19%
YoY to ~| 1233 crore, mainly on account of higher realisations. As a
result, PAT also improved ~175% QoQ to ~| 1065 crore, against our
estimates at | 1292 crore. However, concerns like i) ban on iron ore
exports by Karnataka, ii) logistical bottlenecks in Goa and iii) proposed
mining policy of 26% profit sharing with locals by mining companies
have led us to revise our FY11E and FY12E EPS estimates to | 43.7 and |
38.4, respectively. We have revised our target price on the stock to |
319/share and assigned a REDUCE rating.
ƒ Higher realisations boost performance
Blended realisation for Q3FY11 stood at ~| 4181/tonne as compared
to our estimates at | 3872/tonne. Realisations have improved by
50% compared to Q3FY10. Globally, iron ore prices have firmed up
on the back of strong demand. This has led to improvement in the
price realisation of the company.
ƒ Volume de-growth disappoints
Total iron ore volume declined ~21% YoY to 5.38 MT. This was
mainly on account of closure of its Thakurani mine in Orissa, where
the company failed to renew its long-term agreement with the
miner. Also, volumes at Goa operations were impacted due to
extended monsoons and logistics issues.
Valuation
At the CMP of | 324, the company is trading at 5x and 5.2x its
FY11E and FY12E EV/EBITDA, respectively. We have valued the
stock at 3.5x its FY12E EV/EBITDA. Hence, we have arrived at our
target price of | 319/ share and assigned a REDUCE rating.
Result Analysis
The Q3FY11 performance was healthy backed by improved realisations
and decent volume offtake. Dempo has registered volume growth of
~41% QoQ. EBITDA margins registered a healthy growth of ~ 1779 bps
QoQ due to robust realisations at ~| 4181/tonne. However, going ahead,
volume growth is expected to be muted due to the existing ban in
Karnataka and closure of third-party mine in Orissa. In Q4FY11, we expect
sales volumes to be higher on the back of higher demand and liquidation
of inventory at the Orissa mine. Also, lack of clarity from the government
regarding the Cairn India stake sale has led to some confusion about the
usage of existing cash and cash equivalent reserves of ~| 8229 crore for
expansion purposes ahead.
Global iron prices continued to trade higher in Q3FY11 backed by higher
demand globally and also due to supply side disruption due to recent
floods in Queensland region in Australia. The contract prices were settled
at US$125/ tonne for Q3 and are further likely to be revised upwards due
to the ongoing spurt in iron ore prices due to supply side disruption from
Australia. Spot prices (63.5% Fe) are trading at ~ US$180/tonne CIF.
Going ahead, we may see a further upward bias due to upward revision in
contractual prices by global mining majors.
Outlook & earnings revision
Iron ore prices have surged up sharply of late but are likely to face some
pressure from Q1FY12 onwards based on the commencement of mining
operations at Australia as some normalcy is expected to restore the preflood level volume offtake from the region. 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 the steel demand and, thus, this will
impact the overall demand globally. The fragile nature of 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 prices of iron ore in the medium term.
Back home in the domestic markets, 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, delay in getting
environmental licenses and renewal of mining lease have been raising
questions on the ability of the company to increase its volume.
We have not revised our volume estimates of 17.7 MT in FY11E and 18.4
MT in FY12E. On the realisation front, we have revised our average
realisations upwards to | 3910/tonne in FY11E and expect realisations of
~| 3881/ tonne in FY12E based on the improved realisation levels as seen
lately. The changes in sales volume and realisation have resulted in an
upward revision of EPS estimates for FY12E to | 45.4
Ongoing concerns on a ban on iron ore exports by Karnataka and closure
of Orissa mines 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 | 324, the company is trading at 5x and 5.2x its FY11E and
FY12E EV/ EBITDA respectively. On a PE basis, the stock is discounting its
FY11E and FY12E EPS by 8x and 9.1x, respectively. We have maintained
our target price on the stock at | 319/ share and assigned a REDUCE
rating.
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