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Sesa Goa (SESA)
Metals & Mining
Multiple headwinds eliminate benefit of strong iron ore prices. Sesa Goa guided
for flat volumes in FY2011E (aggressive in our view) and maintained positive capacity
expansion and volumes outlook. We have taken a constructive outlook on iron ore
prices and raise FY2012E and FY2013E benchmark Indian ore (63.5% FOB) price
forecast by 7.1% and 14.3% to US$136 and US$120, respectively. Despite positive
near-term outlook, we maintain REDUCE rating on (1) regulatory risks, (2) limited R&R
and (3) risks to volumes. We raise our target price to Rs315 from Rs300 earlier.
Management optimistic about 40 mn tons capacity by end-FY2013E
Sesa Goa maintained its outlook of 40 mn tons iron ore capacity by end-FY2013E—30 mn tons
from Goa mines and 10 mn from Karnataka mines. However, it did indicate that it will align capex
for expansion with EC approval. Note that Sesa has EC approval to mine 25 mn tons per annum.
In addition, it expects to exit FY2012E with capacity of 10 mn tons in Karnataka. Note that policy
and regulatory uncertainty will have some bearing on iron ore exports. We currently model iron
ore shipment of 19.9, 21.3 and 24.9 mn tons for FY2011E, FY2012E and FY2013E, respectively.
Key highlights from 3QFY11 earnings call; R&R upgrade of at least 20 mn tons
Key highlights include (1) Sesa expects to end FY2011E with similar reserves and resources at the
beginning of FY2010 (excluding Orissa mine); effectively implying R&R upgrade of 20 mn tons.
Note that our fair value is based on R&R upgrade of at least 80 mn tons; (2) Sesa has total iron ore
inventory of 5.87 mn tons—3 mn in Goa, 2.5 mn in Karnataka and 0.27 mn in Orissa. Orissa
inventory will be liquidated in 4QFY11E; (3) the company has ramped up domestic sales
aggressively from Karnataka mine which stood at 0.7 mn tons. Realization in domestic sales was
US$35/ton lower than exports; (4) imposition of load limit per truck and restriction on timing of
movement of trucks may impact shipments from mines in Goa; (5) company is actively pursuing
acquisition opportunities in and outside India and (6) State Government in Goa is unlikely to take
up new request for mining expansion till new MMDR rules are finalized.
Maintain REDUCE rating; multiple headwinds ahead
Concerns on iron exports from India, floods in Brazil and delay in iron ore capacity expansion by
the non-Big 3 miners underpin our near-term positive outlook on iron ore prices—we now model
iron ore prices of US$136/ton and US$120/ton for FY2012E and FY2013E. Our core EBITDA
estimates increase by 9.7% and 5.5% to Rs60.9 bn and Rs55.5 bn for FY2012E and FY2013E,
respectively. EPS estimates increase to Rs62.2 and Rs59 per share on higher iron ore price
realization. Despite EPS increase, we maintain our negative stance on Sesa. Our fair value of Rs315
comprises Rs185/share value for core business of Sesa and Rs130 for stake in Cairn India.
Core business valuations based on generous assumptions
We find Sesa Goa’s valuations expensive even after building in (1) aggressive long-term iron
ore price of US$85dmt (long-term benchmark price, fob basis) and (2) further reserve
accretion of about 80 mn.
Sesa faces multiple headwinds in the form of (1) likely increase in export duty; media reports
indicate that export duty may be increased to a uniform 20% from 15% on lumps and 5%
on fines currently; (2) risk to estimates on iron ore shipments; (3) potential changes in
MMDR Act that may call for sharing of 26% of profit generated; (4) unrelated and valuedestructive
move to acquire 20% in Cairn India. Not only Sesa is overpaying for the asset,
the move appears to be driven to fund group aspirations.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa (SESA)
Metals & Mining
Multiple headwinds eliminate benefit of strong iron ore prices. Sesa Goa guided
for flat volumes in FY2011E (aggressive in our view) and maintained positive capacity
expansion and volumes outlook. We have taken a constructive outlook on iron ore
prices and raise FY2012E and FY2013E benchmark Indian ore (63.5% FOB) price
forecast by 7.1% and 14.3% to US$136 and US$120, respectively. Despite positive
near-term outlook, we maintain REDUCE rating on (1) regulatory risks, (2) limited R&R
and (3) risks to volumes. We raise our target price to Rs315 from Rs300 earlier.
Management optimistic about 40 mn tons capacity by end-FY2013E
Sesa Goa maintained its outlook of 40 mn tons iron ore capacity by end-FY2013E—30 mn tons
from Goa mines and 10 mn from Karnataka mines. However, it did indicate that it will align capex
for expansion with EC approval. Note that Sesa has EC approval to mine 25 mn tons per annum.
In addition, it expects to exit FY2012E with capacity of 10 mn tons in Karnataka. Note that policy
and regulatory uncertainty will have some bearing on iron ore exports. We currently model iron
ore shipment of 19.9, 21.3 and 24.9 mn tons for FY2011E, FY2012E and FY2013E, respectively.
Key highlights from 3QFY11 earnings call; R&R upgrade of at least 20 mn tons
Key highlights include (1) Sesa expects to end FY2011E with similar reserves and resources at the
beginning of FY2010 (excluding Orissa mine); effectively implying R&R upgrade of 20 mn tons.
Note that our fair value is based on R&R upgrade of at least 80 mn tons; (2) Sesa has total iron ore
inventory of 5.87 mn tons—3 mn in Goa, 2.5 mn in Karnataka and 0.27 mn in Orissa. Orissa
inventory will be liquidated in 4QFY11E; (3) the company has ramped up domestic sales
aggressively from Karnataka mine which stood at 0.7 mn tons. Realization in domestic sales was
US$35/ton lower than exports; (4) imposition of load limit per truck and restriction on timing of
movement of trucks may impact shipments from mines in Goa; (5) company is actively pursuing
acquisition opportunities in and outside India and (6) State Government in Goa is unlikely to take
up new request for mining expansion till new MMDR rules are finalized.
Maintain REDUCE rating; multiple headwinds ahead
Concerns on iron exports from India, floods in Brazil and delay in iron ore capacity expansion by
the non-Big 3 miners underpin our near-term positive outlook on iron ore prices—we now model
iron ore prices of US$136/ton and US$120/ton for FY2012E and FY2013E. Our core EBITDA
estimates increase by 9.7% and 5.5% to Rs60.9 bn and Rs55.5 bn for FY2012E and FY2013E,
respectively. EPS estimates increase to Rs62.2 and Rs59 per share on higher iron ore price
realization. Despite EPS increase, we maintain our negative stance on Sesa. Our fair value of Rs315
comprises Rs185/share value for core business of Sesa and Rs130 for stake in Cairn India.
Core business valuations based on generous assumptions
We find Sesa Goa’s valuations expensive even after building in (1) aggressive long-term iron
ore price of US$85dmt (long-term benchmark price, fob basis) and (2) further reserve
accretion of about 80 mn.
Sesa faces multiple headwinds in the form of (1) likely increase in export duty; media reports
indicate that export duty may be increased to a uniform 20% from 15% on lumps and 5%
on fines currently; (2) risk to estimates on iron ore shipments; (3) potential changes in
MMDR Act that may call for sharing of 26% of profit generated; (4) unrelated and valuedestructive
move to acquire 20% in Cairn India. Not only Sesa is overpaying for the asset,
the move appears to be driven to fund group aspirations.
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