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Higher volumes and realisations boost revenue
Sesa Goa reported Q3FY11 consolidated net revenue of INR 22.5 bn, 13% above
our estimate, due to higher–than-estimated iron ore volume of 5.4 mt (our
estimate: 5 mt) and blended realisation of USD 87/t (our estimate: 80/t).
Production volume, at 5.3 mt, indicates that the company sold from inventory.
Volumes dipped 20% Y-o-Y due to extended monsoons, restricted road transport
timings in Goa, current export ban imposed by the Karnataka government in July
2010, and cessation of mining operations in Orissa from December 2010.
Rise in cost push here to stay
Iron ore cash costs increased from USD 21/t in Q3FY10 to USD 38/t in Q3FY11.
Media reports suggest that rail freight costs are set to increase by 50%. If
implemented, this would impact future profitability from Karnataka.
Management guided to 40 mtpa FY13 exit run rate volume
The company is in advanced stage to receive an environmental clearance (EC)
for 10 mtpa mining permit in Karnataka from the current 6 mtpa. Similarly, it is
in the process of procuring a mining permit in Goa to increase capacity to 30
mtpa from the current 17 mtpa. Management indicated it expects to receive the
requisite approvals by end FY13.
Exports from Karnataka likely to restart in February
The Supreme Court has directed Karnataka government to frame laws against
illegal mining within two weeks or lift the ban on iron ore exports. Sesa Goa is
confident that the ban will be reversed and exports will restart from February.
Outlook and valuations: Upsides priced in; maintain ‘REDUCE’
While we have cut FY11 iron ore volume estimate by 4%, we have kept FY12
volumes unchanged. In the near term, iron ore prices have surprised on the
upside and we raise our price estimates by 1.5% for FY11 and ~3% for FY12.
Led by this, EBITDA has been raised ~4% for both FY11E and FY12E, after
incorporating the cost push. However, we expect correction in iron ore prices in
H2FY12 to USD 130/t FOB (63 Fe) from current levels of over USD 160/t FOB as
global iron ore miners ramp up capacity by 60 mtpa and Chinese domestic iron
ore capacity increases by 40 mtpa. We are introducing FY13 estimates. Our fair
valuation works out to INR 308/share (earlier: INR 300). We maintain
‘REDUCE/Sector Underperformer’ recommendation/rating on the stock.
Iron ore cash costs up at USD 38/t (USD 21/t in Q3FY10)
EBITDA came at INR 12.3 bn (up 12% Y-o-Y), above our estimate of INR 9.9 bn. PAT,
INR 10.6 bn, was up 29% Y-o-Y due to lower tax rate of 19% in Q3FY11 against 26% in
Q3FY10 and other income being up 92% Y-o-Y. Current cash on books is INR 92 bn
(including the ICD of INR 10 bn to Sterlite Energy).
Y-o-Y, costs rose primarily due to increase in export duty, royalty, and other services.
We note that from Q4FY10, the cost has increased by USD 8/t in Q1FY11 and further
USD 7/t in Q3FY11. A positive on the cost front was the sharp decline in inland
transportation cost, both Y-o-Y and Q-o-Q, which possibly reflects the increased
proportion of Goa sales.
Key conference call highlights
• Out of total sales volume of 5.4 mt during the quarter, sales from Goa, Karnataka,
and Orissa were 4.2 mt (down 18% Y-o-Y), 700 kt (down 26% Y-o-Y), and 450 kt
(down 25% Y-o-Y), respectively. Dempo sales were 160 kt.
• The company sold 15% of its volume in the domestic market in Q3FY11 against 3%
in Q3FY10. Realisations and profits for these sales were USD 30-40/t lower than
exports.
• FY12 tax rate guided at 32-33%, up from earlier 25%.
• Freight costs have increased in Goa due to reduced timings and lower truck loading.
Royalty has increased from INR 150/t in Q2FY11 to INR 233/t in Q3FY11.
• Capex spent in 9mFY11 on pig iron expansion project is INR 4.3 bn. Project expected
to be completed by mid 2012 as scheduled.
Revision of estimates
Based on 9mFY11 performance, we have cut our FY11 volume estimates by 4%. With
prices being firm, we have increased our price estimates for FY11 and FY12. With EOU
status expiring in FY12, we have assumed full tax rate for Sesa Goa against 25% earlier
leading EPS being cut by 3% in spite of the increase in EBITDA.
Fair valuation at INR 308/share
We have arrived at fair value per share of INR 308 for the company by taking an average
of EV/EBITDA and DCF valuation
Company Description
Sesa Goa is India’s largest private sector player in iron ore. In April 2007, Vedanta
Resources acquired 51% (controlling stake) in the company from Mitsui & Company,
Japan. It has operations in Goa, Karnataka, and Orissa, with an annual processing
capacity of 25 mt logistics capacity including third-party mining. The company has
access to mining resource of 273 mt, with additional prospecting licenses in Jharkhand.
It also operates a pig iron plant of 250,000 tpa and a met coke plant of 280,000 tpa. In
FY09, the company exported close to 96% of its iron ore volume, with China accounting
for 84% of the total sales volume. For the pig iron unit, 30% of the iron ore requirement
is met captively. The entire coke requirement for pig iron is met captively.
Investment Theme
Sesa Goa’s operational cost for the iron ore business is relatively lower due to inherent
natural cost advantage of the Indian iron ore mines. Also, its Goa mines are located
close to ports, thus, saving the company freight costs. However, the volumes are likely
to decline in FY11 as against earlier expectation of 20% growth. Costs also have
increased for the company thereby putting earnings under pressure. We also expect iron
ore prices to soften in FY12.
Key Risks
• Higher than estimated volumes
• Iron ore prices higher than estimates
• Operational costs turn out to be lower than estimates
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher volumes and realisations boost revenue
Sesa Goa reported Q3FY11 consolidated net revenue of INR 22.5 bn, 13% above
our estimate, due to higher–than-estimated iron ore volume of 5.4 mt (our
estimate: 5 mt) and blended realisation of USD 87/t (our estimate: 80/t).
Production volume, at 5.3 mt, indicates that the company sold from inventory.
Volumes dipped 20% Y-o-Y due to extended monsoons, restricted road transport
timings in Goa, current export ban imposed by the Karnataka government in July
2010, and cessation of mining operations in Orissa from December 2010.
Rise in cost push here to stay
Iron ore cash costs increased from USD 21/t in Q3FY10 to USD 38/t in Q3FY11.
Media reports suggest that rail freight costs are set to increase by 50%. If
implemented, this would impact future profitability from Karnataka.
Management guided to 40 mtpa FY13 exit run rate volume
The company is in advanced stage to receive an environmental clearance (EC)
for 10 mtpa mining permit in Karnataka from the current 6 mtpa. Similarly, it is
in the process of procuring a mining permit in Goa to increase capacity to 30
mtpa from the current 17 mtpa. Management indicated it expects to receive the
requisite approvals by end FY13.
Exports from Karnataka likely to restart in February
The Supreme Court has directed Karnataka government to frame laws against
illegal mining within two weeks or lift the ban on iron ore exports. Sesa Goa is
confident that the ban will be reversed and exports will restart from February.
Outlook and valuations: Upsides priced in; maintain ‘REDUCE’
While we have cut FY11 iron ore volume estimate by 4%, we have kept FY12
volumes unchanged. In the near term, iron ore prices have surprised on the
upside and we raise our price estimates by 1.5% for FY11 and ~3% for FY12.
Led by this, EBITDA has been raised ~4% for both FY11E and FY12E, after
incorporating the cost push. However, we expect correction in iron ore prices in
H2FY12 to USD 130/t FOB (63 Fe) from current levels of over USD 160/t FOB as
global iron ore miners ramp up capacity by 60 mtpa and Chinese domestic iron
ore capacity increases by 40 mtpa. We are introducing FY13 estimates. Our fair
valuation works out to INR 308/share (earlier: INR 300). We maintain
‘REDUCE/Sector Underperformer’ recommendation/rating on the stock.
Iron ore cash costs up at USD 38/t (USD 21/t in Q3FY10)
EBITDA came at INR 12.3 bn (up 12% Y-o-Y), above our estimate of INR 9.9 bn. PAT,
INR 10.6 bn, was up 29% Y-o-Y due to lower tax rate of 19% in Q3FY11 against 26% in
Q3FY10 and other income being up 92% Y-o-Y. Current cash on books is INR 92 bn
(including the ICD of INR 10 bn to Sterlite Energy).
Y-o-Y, costs rose primarily due to increase in export duty, royalty, and other services.
We note that from Q4FY10, the cost has increased by USD 8/t in Q1FY11 and further
USD 7/t in Q3FY11. A positive on the cost front was the sharp decline in inland
transportation cost, both Y-o-Y and Q-o-Q, which possibly reflects the increased
proportion of Goa sales.
Key conference call highlights
• Out of total sales volume of 5.4 mt during the quarter, sales from Goa, Karnataka,
and Orissa were 4.2 mt (down 18% Y-o-Y), 700 kt (down 26% Y-o-Y), and 450 kt
(down 25% Y-o-Y), respectively. Dempo sales were 160 kt.
• The company sold 15% of its volume in the domestic market in Q3FY11 against 3%
in Q3FY10. Realisations and profits for these sales were USD 30-40/t lower than
exports.
• FY12 tax rate guided at 32-33%, up from earlier 25%.
• Freight costs have increased in Goa due to reduced timings and lower truck loading.
Royalty has increased from INR 150/t in Q2FY11 to INR 233/t in Q3FY11.
• Capex spent in 9mFY11 on pig iron expansion project is INR 4.3 bn. Project expected
to be completed by mid 2012 as scheduled.
Revision of estimates
Based on 9mFY11 performance, we have cut our FY11 volume estimates by 4%. With
prices being firm, we have increased our price estimates for FY11 and FY12. With EOU
status expiring in FY12, we have assumed full tax rate for Sesa Goa against 25% earlier
leading EPS being cut by 3% in spite of the increase in EBITDA.
Fair valuation at INR 308/share
We have arrived at fair value per share of INR 308 for the company by taking an average
of EV/EBITDA and DCF valuation
Company Description
Sesa Goa is India’s largest private sector player in iron ore. In April 2007, Vedanta
Resources acquired 51% (controlling stake) in the company from Mitsui & Company,
Japan. It has operations in Goa, Karnataka, and Orissa, with an annual processing
capacity of 25 mt logistics capacity including third-party mining. The company has
access to mining resource of 273 mt, with additional prospecting licenses in Jharkhand.
It also operates a pig iron plant of 250,000 tpa and a met coke plant of 280,000 tpa. In
FY09, the company exported close to 96% of its iron ore volume, with China accounting
for 84% of the total sales volume. For the pig iron unit, 30% of the iron ore requirement
is met captively. The entire coke requirement for pig iron is met captively.
Investment Theme
Sesa Goa’s operational cost for the iron ore business is relatively lower due to inherent
natural cost advantage of the Indian iron ore mines. Also, its Goa mines are located
close to ports, thus, saving the company freight costs. However, the volumes are likely
to decline in FY11 as against earlier expectation of 20% growth. Costs also have
increased for the company thereby putting earnings under pressure. We also expect iron
ore prices to soften in FY12.
Key Risks
• Higher than estimated volumes
• Iron ore prices higher than estimates
• Operational costs turn out to be lower than estimates
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