Anand Rathi:: Sesa Goa Regulatory hurdles continue; maintain Hold

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Sesa Goa
Regulatory hurdles continue; maintain Hold
To control rising iron ore prices and curb iron ore exports, the
Indian government raised export duty on iron ore fines and
lumps. This is a major negative for Sesa Goa, leading to our
FY12e earnings downgrade, by 16%. We cut our target price by
~14%, while maintaining a Hold.

 Increase in iron ore export duty, as expected. As we expected,
Union Budget 2011-12 proposed increasing export duty on iron
ore fines (from 5%) and iron ore lumps (from 15%) to a uniform
20% ad-valorem. This would hit Sesa as it is a major exporter
(~90%) of iron ore. Iron ore fines make up ~85% of its volumes;
hence, a 4x rise in export duty on iron ore fines would have a
major impact on earnings.
 Earnings downgrade of ~16% in FY12. We estimate Sesa’s
FY12 EBITDA to be impacted by 18.5% on account of the rise in
export duty, while the FY12 EPS would be 15.7% lower, from
`58.4 earlier to `49.2.
 Regulatory hurdles not over. Regulatory hurdles curb Sesa’s
growth. The new mining bill is key to watch, as it proposes 26%
profit-sharing by miners with locals. We believe that the stock
would be subdued till clarity emerges regarding the bill.
 Maintaining a Hold; cutting TP by ~14%. At the CMP of
`272, the stock trades at 5.5x FY12e PE and 5.8x EV/E. We
maintain a Hold with a lower target price of `296 (from `346).
Key downside/upside risk: Removal of/continued ban on ironore
exports in Karnataka.


Valuation and risks
At the current market price of `272, the stock trades at FY12e PE of 5.5x
and EV/EBITDA of 5.8x. We believe Sesa is exposed to regulatory
hurdles such as obtaining environmental clearances, changes in the tax/
duties on iron ore by the government, ban on iron ore exports and
logistics issues.
Volume uncertainty persists as the iron ore export ban in Karnataka
continues. However, management expects the ban to be lifted soon. We
maintain our Hold on the stock, while pruning our target price to `296,
from `346.
Risks
 Ban on iron ore exports in Karnataka continues
 Sharp correction in iron ore prices due to a slowdown in China
 Delay in obtaining environmental clearances
 26% profit sharing in the new mining bill.