Edelweiss: Reduce Sesa Goa - hit by increased export duty

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Sesa Goa (SESA IN, INR 261, Reduce)

n  Hike in export duty to hurt profitability significantly

The government has raised export duty on iron lumps and fines to 20% of selling price (FOB) as part of the Union Budget proposals today; it was at 5% for fines and 15% for lumps earlier. Iron ore exporters will be adversely impacted by this proposal, particularly Sesa Goa as it exports ~90% of total volume, of which ~85% is fines. We incorporate the same in our earnings model.

n  Revising FY12E and FY13E earnings down over 20%

In light of the hike in export duty, we are revising down our FY12E EBITDA and net profit estimates ~24.6% and 22.3%, respectively. For FY13, the same duty structure will result in 21.2% and 20.1% decline in EBITDA and net profit, respectively.

n  High iron ore prices likely to keep export duty and freight cost high

Export duty on iron ore has undergone numerous changes in the past two years ranging from 0% to 20% currently. We believe as long as iron ore prices remain high, potentially above USD 100 FOB (63 Fe), export duty is unlikely to dip meaningfully. In addition, Indian Railways is also known to hike freights in such situations.

n  Outlook and valuations: Issues continue; maintain ‘REDUCE’

Sesa Goa has been constantly facing challenges on the volume front with the Orissa mine now out of operations, the effective export ban in Karnataka till date, and lack of approvals for additional volumes in Goa. However, our FY12 volume estimate of 21 mt assumes revoking of the ban in Karnataka, which is likely considering the latest Supreme Court directive to the government to frame guidelines for export. In addition, we expect issues of high export duty and railway freight to add to the cost pressure. With iron prices determined by Chinese steel demand-supply, we do not see possibility of pass through of the same. We maintain our ‘REDUCE/ Sector Underperformer’ recommendation/ rating on the stock with a revised fair value of INR 275/share (earlier INR 308/share). Over the long term, we expect domestic sales proportion of Sesa Goa and other exporters to increase as they look to diversify their business mix.