Sesa Goa -Short of expectations, opportunities ahead; Hold :: Emkay

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Sesa Goa

Short of expectations, opportunities ahead; Hold

HOLD

CMP: Rs 330                                       Target Price: Rs 354

---

n     Despite improvement on both YoY and QoQ basis Sesa Goa reported lower than expected numbers for Q3FY11 with revenue came at Rs 22.5 bn up 19% YoY

n     EBITDA remained at Rs 12.3 bn up by 19% YoY while EBITDA margin remained flat YoY at 54.8%. Higher export duty and logistics costs partly offset YoY rise in realizations  

n     APAT grew by 29% YoY and 177% QoQ to Rs 10.65 bn, this is due to YoY reduction in depreciation and interest cost by 8% and 47% respectively

n     Revising our earnings estimates for FY11E and FY12E to Rs 48.6 and Rs 44.3 respectively. Recommend HOLD

Sales volume dropped higher than expected

Sales volume was reported at 5.381 mn tonnes for Q3FY11, significantly lower than our

expectations of 6.4 mn tonnes. According to the company, this was due to prolonged

monsoon in Goa and logistical bottlenecks in all the three states of operation viz. Goa,

Karnataka and Orissa. The company has sold 4.2 mn tonnes from Goa, 0.5 mn tonnes

from Orisssa and 0.7 mn tonnes from Karnataka. Duty continuing ban of iron ore

exports in Karnataka, the share of domestic sales rose to 15% compared to 3% in

Q3FY10 and for the 9MFY11 it remained at 11% against 7% during 9MFY10.

Higher costs and lower domestic realization restricted margin expansion

Along with the continuing logistical problems in the states of Karnataka and Orissa, the

company experienced problems in its Goa operation too due to time and weight

restrictions in movement of iron ore by trucks. This has increased the freight costs too

by ~US$1.2 per tonne in Goa. On a YoY basis rise in the export duty (5% on fines and

15% on lumps) and royalty rates (Rs 233/ tonne in Q3FY11) also put some pressure on

the margins. Along with the higher costs, lower realizations (US$35/ tonne less) in

domestic sales compared to exports also restricted the margin expansion on YoY basis.

Volume guidance maintained at 40 mn tonnes for FY12 (exit)

The management has reiterated its volume guidance of 40 mn tonnes for FY12 (exit)

with 30 mn tonne from Goa and 10 mn tonne from Karnataka. The company is confident

of getting necessary approval to achieve an exit rate of 10 million tonnes from

Karnataka in FY12 from currently ~6 mn tonnes. We believe this would not be very easy

without any inorganic growth as there are still uncertainty on regulations and policy

measures in both the sates of Karnataka and Goa.

Outlook and Valuations

At the CMP of RS 340, the stock is trading at 7.4x its FY12E EPS and 3.1x FY12E EV/

EBITDA. We feel considering the current situation the stock is almost fairly valued. We

value the stock 3.5xFY12EV/ EBITDA to arrive at a target price of Rs 354/ share. We

assign HOLD rating on the stock.

Volume growth remains uncertain for FY12; tax rate to dent PAT

Though, the management is confident on volume growth in FY13, however, volume growth

in FY12 remains uncertain. The company however, expects lifting of ban on exports from

Karnataka in February itself. About 2.3 mn tonnes of iron ore inventory pile up is there in

Karnataka which can immediately be ramped up and that may lead to decent jump in

volume in Q4FY11 and Q1FY12. In Goa too the company is carrying an inventory of about

3 mn tonne. Contribution from Orissa also would be available in Q4FY11. However, for the

entire FY12, there would be a short fall of ~2 mn tonne due to cancellation of third party

mining in Orissa. We haven’t taken any significant volume growth for FY12 and would like

to wait for more clarity as of now.

As the benefit of EOU would be over by March 2011, full tax rate would be applicable to the

company from the FY12. This would surely make dent in the PAT on a comparative basis.

Earning estimates; Hold

Our FY11E and FY12E EPS estimate remain at Rs 48.6 and Rs 44.3 respectively. We

believe the sales volume growth to remain muted in FY12 at 21.2 mn tonne however,

positive surprise would come from higher contribution from Karnataka and favourable

mining policy in Goa. We are also assuming average blended realization of US$86/ tonne.

On the balance sheet front, Sesa holds healthy cash of Rs 82.3 bn. Any expansion/ M & A

announcement warrants a change in our estimates.

Valuation

At the CMP of RS 340, the stock is trading at 7.4x its FY12E EPS and 3.1x FY12E EV/

EBITDA. We feel considering the current situation the stock is almost fairly valued. We

value the stock 3.5xFY12EV/ EBITDA to arrive at a target price of Rs 354/ share. We

assign HOLD rating on the stock.