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For 3QFY2011, Sesa Goa reported moderate growth of 19.1% yoy to `2,250cr,
above our estimates of `1,855cr. Net sales came in above our expectations on
account of higher-than-expected realisation on iron ore sales; however, sales
volumes came in below expectations.
Sales volume disappoints, but realisations improve: During 3QFY2011,
production was lower due to extended monsoons and restricted road timings in
Goa. Further, we believe the state-wide ban on export of iron ore from Karnataka
hit the company’s operations in Karnataka. Thus, overall sales volumes of iron
ore and pig iron fell by 20.8% yoy and 11.1% yoy to 5.4mn tonnes and 0.6mn
tonnes, respectively. EBITDA margin came in flat at 54.7% yoy, as the positive
impact of higher realisations was offset by increased royalty rates and higher
freight cost per tonne. Royalty cost for the quarter increased to `233/tonne.
Freight cost in Goa increased by US $1.2/tonne qoq. Other income decreased by
4.3% yoy to `127cr. Lower tax rate at 19.4% in 3QFY2011 v/s 25.9% in
3QFY2010 led to a 28.7% yoy increase in the bottom line to `1,065cr.
Outlook and valuation: Sesa Goa is currently trading at 4.4x FY2011E and 2.9x
FY2012E EV/EBITDA. On a P/BV basis, the stock is trading at 2.2x FY2011E and
1.8x FY2012E estimates. We have raised our revenue and profitability estimates
for FY2012E to factor in higher iron ore realisation. Although we expect volume
growth to remain muted, we expect higher iron ore prices to boost Sesa Goa’s
profitability going forward. Hence, we now value Sesa Goa at 3.5x EV/EBITDA
multiple and raise our target price to `356. Thus, we upgrade the stock from
Neutral to Accumulate.
EBITDA margin flat yoy
In 3QFY2011, EBITDA margin stood flat at 54.7% yoy, as the positive impact of
higher realisations was offset by increased royalty rates and higher freight cost per
tonne. Royalty cost for the quarter increased to `233/tonne. Freight cost in Goa
increased by US $1.2/tonne qoq. Other income decreased by 4.3% yoy to `127cr.
Lower tax rate at 19.4% in 3QFY2011 v/s 25.9% in 3QFY2010 led to a 28.7% yoy
increase in the bottom line to `1,065cr.
Key takeaways from the conference call
�� Management expects sales volumes for FY2012E to remain flat. However,
management maintained its guidance of reaching an exit capacity of 40mn
tonnes by the end of FY2013E.
�� The company’s domestic sales volumes contributed 15% to total volumes in
3QFY2011, compared to 3% of total volumes sold in 3QFY2010.
�� Excluding the inter-corporate deposit of `1,000cr, extended to Vedanta
Aluminium, the company had cash and cash equivalents of `8,229cr.
�� Management expects the company’s mining capacity to increase to 10mn
tonnes in Karnataka by FY2012E (current capacity: 6mn tonnes). The
environment clearance for the extended 4mn tonnes in Karnataka is at an
advanced stage.
Outlook
Crude steel production in China has picked up recently…
After a decline in monthly crude steel production during June, July and August
2010, steel production has increased sequentially during 3QFY2011. According to
World Steel data, China’s crude steel production in CY2010 increased by 9.3%
yoy to 627mn tonnes. The Australian Bureau of Agricultural and Resource
Economics and Sciences expects Chinese crude steel production to increase by
7.5% yoy to 674mn tonnes in CY2011.
…leading to a spurt in spot iron ore prices recently
Higher crude steel production has led to an increase in spot iron ore prices to over
US $180 per tonne. However, growth in production of iron ore in China has
remained flat during the past quarter.
Also, 70% of sea-borne iron ore supply is held by three mining majors (Rio Tinto
Ltd., BHP Billiton and Vale Ltd.); this offers a strong bargaining power to these
players. Hence, we believe iron ore prices will remain firm in FY2012.
Imports of iron ore by China have increased recently
Demand for imported iron ore has increased recently as Chinese steel production
continues to rise. Consequently, during 3QFY2011, imports surged on a qoq
basis. However, iron ore inventories have continued to increase (currently at over
80mn tonnes). We expect demand from China to continue to remain lumpy,
leading to volatility in spot iron ore prices, though we expect prices to remain firm.
However, India’s share in total imports to China has fallen (yoy) recently on
account of ban on iron ore exports by the Karnataka government.
Valuation
We expect iron ore sales volume growth to remain muted in FY2012E for Sesa
Goa. Nevertheless, spot iron ore prices have risen steeply during the past three
months on the back of improved demand from China. Hence, going forward, we
believe rising costs will be more than offset by rising iron ore prices. However,
lumpiness in iron ore demand, huge swings in iron ore prices, threat of the Indian
government raising export duty on iron ore fines, logistical issues in Goa and
stricter regulations imposed by the government are the key concerns for Sesa Goa
in the near-to-medium term. Nevertheless, we believe the current price levels
discount these negatives. A key catalyst for the stock could be lifting of iron ore
export ban by the Karnataka government (the current ban is applicable until
January 2011).
Sesa Goa is currently trading at 4.4x FY2011E and 2.9x FY2012E EV/EBITDA. On
a P/BV basis, the stock is trading at 2.2x FY2011E and 1.8x FY2012E estimates.
Although we have lowered our sales volume estimates for FY2012E, we have
raised our iron ore price assumptions. Hence, overall, our revenue and profitability
estimates for FY2012E are revised upwards. We now value Sesa Goa at 3.5x
EV/EBITDA multiple and raise our target price to `356 per share. Thus, we
upgrade the stock from Neutral to Accumulate.
However, the downside risk to our estimates exists in case the government increases
export tax on iron ore fines to 20% from the current 5%.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa – 3QFY2011 Result Update
Angel Broking upgrades Sesa Goa from Neutral to Accumulate with a Target Price of Rs. 356.
For 3QFY2011, Sesa Goa reported moderate growth of 19.1% yoy to `2,250cr,
above our estimates of `1,855cr. Net sales came in above our expectations on
account of higher-than-expected realisation on iron ore sales; however, sales
volumes came in below expectations.
Sales volume disappoints, but realisations improve: During 3QFY2011,
production was lower due to extended monsoons and restricted road timings in
Goa. Further, we believe the state-wide ban on export of iron ore from Karnataka
hit the company’s operations in Karnataka. Thus, overall sales volumes of iron
ore and pig iron fell by 20.8% yoy and 11.1% yoy to 5.4mn tonnes and 0.6mn
tonnes, respectively. EBITDA margin came in flat at 54.7% yoy, as the positive
impact of higher realisations was offset by increased royalty rates and higher
freight cost per tonne. Royalty cost for the quarter increased to `233/tonne.
Freight cost in Goa increased by US $1.2/tonne qoq. Other income decreased by
4.3% yoy to `127cr. Lower tax rate at 19.4% in 3QFY2011 v/s 25.9% in
3QFY2010 led to a 28.7% yoy increase in the bottom line to `1,065cr.
Outlook and valuation: Sesa Goa is currently trading at 4.4x FY2011E and 2.9x
FY2012E EV/EBITDA. On a P/BV basis, the stock is trading at 2.2x FY2011E and
1.8x FY2012E estimates. We have raised our revenue and profitability estimates
for FY2012E to factor in higher iron ore realisation. Although we expect volume
growth to remain muted, we expect higher iron ore prices to boost Sesa Goa’s
profitability going forward. Hence, we now value Sesa Goa at 3.5x EV/EBITDA
multiple and raise our target price to `356. Thus, we upgrade the stock from
Neutral to Accumulate.
Volume growth impacted again
During the quarter, production was lower on account of extended monsoons and
restricted road timings in Goa. Iron ore sales volume from Goa decreased by 18%
yoy to 4.2mn tonnes. Moreover, we believe the state-wide ban on export of iron
ore from Karnataka hit the company’s operations in Karnataka. Iron ore sales
volume from Karnataka and Orissa were down 26% yoy and 32% yoy,
respectively. Hence, overall sales volumes of iron ore and pig iron declined by
20.8% yoy and 11.1% yoy to 5.4mn tonnes and 0.6mn tonnes, respectively.
However, on the positive side, average iron ore realisations increased by 58.8%
yoy to US $87/tonne. Average pig iron realisation also increased by 27.7% yoy to
`25,303/tonne. Thus, revenue grew by 19.1% yoy to `2,250cr during 3QFY2011.
EBITDA margin flat yoy
In 3QFY2011, EBITDA margin stood flat at 54.7% yoy, as the positive impact of
higher realisations was offset by increased royalty rates and higher freight cost per
tonne. Royalty cost for the quarter increased to `233/tonne. Freight cost in Goa
increased by US $1.2/tonne qoq. Other income decreased by 4.3% yoy to `127cr.
Lower tax rate at 19.4% in 3QFY2011 v/s 25.9% in 3QFY2010 led to a 28.7% yoy
increase in the bottom line to `1,065cr.
Key takeaways from the conference call
�� Management expects sales volumes for FY2012E to remain flat. However,
management maintained its guidance of reaching an exit capacity of 40mn
tonnes by the end of FY2013E.
�� The company’s domestic sales volumes contributed 15% to total volumes in
3QFY2011, compared to 3% of total volumes sold in 3QFY2010.
�� Excluding the inter-corporate deposit of `1,000cr, extended to Vedanta
Aluminium, the company had cash and cash equivalents of `8,229cr.
�� Management expects the company’s mining capacity to increase to 10mn
tonnes in Karnataka by FY2012E (current capacity: 6mn tonnes). The
environment clearance for the extended 4mn tonnes in Karnataka is at an
advanced stage.
Outlook
Crude steel production in China has picked up recently…
After a decline in monthly crude steel production during June, July and August
2010, steel production has increased sequentially during 3QFY2011. According to
World Steel data, China’s crude steel production in CY2010 increased by 9.3%
yoy to 627mn tonnes. The Australian Bureau of Agricultural and Resource
Economics and Sciences expects Chinese crude steel production to increase by
7.5% yoy to 674mn tonnes in CY2011.
…leading to a spurt in spot iron ore prices recently
Higher crude steel production has led to an increase in spot iron ore prices to over
US $180 per tonne. However, growth in production of iron ore in China has
remained flat during the past quarter.
Also, 70% of sea-borne iron ore supply is held by three mining majors (Rio Tinto
Ltd., BHP Billiton and Vale Ltd.); this offers a strong bargaining power to these
players. Hence, we believe iron ore prices will remain firm in FY2012.
Imports of iron ore by China have increased recently
Demand for imported iron ore has increased recently as Chinese steel production
continues to rise. Consequently, during 3QFY2011, imports surged on a qoq
basis. However, iron ore inventories have continued to increase (currently at over
80mn tonnes). We expect demand from China to continue to remain lumpy,
leading to volatility in spot iron ore prices, though we expect prices to remain firm.
However, India’s share in total imports to China has fallen (yoy) recently on
account of ban on iron ore exports by the Karnataka government.
Valuation
We expect iron ore sales volume growth to remain muted in FY2012E for Sesa
Goa. Nevertheless, spot iron ore prices have risen steeply during the past three
months on the back of improved demand from China. Hence, going forward, we
believe rising costs will be more than offset by rising iron ore prices. However,
lumpiness in iron ore demand, huge swings in iron ore prices, threat of the Indian
government raising export duty on iron ore fines, logistical issues in Goa and
stricter regulations imposed by the government are the key concerns for Sesa Goa
in the near-to-medium term. Nevertheless, we believe the current price levels
discount these negatives. A key catalyst for the stock could be lifting of iron ore
export ban by the Karnataka government (the current ban is applicable until
January 2011).
Sesa Goa is currently trading at 4.4x FY2011E and 2.9x FY2012E EV/EBITDA. On
a P/BV basis, the stock is trading at 2.2x FY2011E and 1.8x FY2012E estimates.
Although we have lowered our sales volume estimates for FY2012E, we have
raised our iron ore price assumptions. Hence, overall, our revenue and profitability
estimates for FY2012E are revised upwards. We now value Sesa Goa at 3.5x
EV/EBITDA multiple and raise our target price to `356 per share. Thus, we
upgrade the stock from Neutral to Accumulate.
However, the downside risk to our estimates exists in case the government increases
export tax on iron ore fines to 20% from the current 5%.
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