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Policy risks playing out
The hike in iron ore export duty in India’s union budget for FY12
highlights the high level of regulatory and policy risks that engulf Sesa’s
stock. With this hike, our FY12-13 EPS estimates decline ~10%, buffered
slightly by higher profit forecasts for Cairn India by CLSA’s oil & gas team.
Our sum-of-parts target price drops to Rs215 – 17% downside. With iron
ore prices likely to head south in coming months (as per CLSA’s resources
team) and Sesa still not getting any incremental approval for increasing
mining output, we see little reason for a reversal of the stock’s
underperformance of the last 12 months. Maintain SELL.
Iron ore export duty hiked
The Indian government has hiked export duty on iron ore fines from 5% to
20% and on iron ore lumps from 15% to 20%. Export duty on iron ore pellets
has been cut to 0% to incentivize iron ore producers to carry out valueaddition
to pellet stage.
Iron ore prices not likely to see a boost from this
CLSA’s commodity strategist – Ian Roper – says that the hike in export duty is
not likely to have any positive effect on spot iron ore prices given that Indian
miners enjoy a low cost structure. He believes that margins of Indian miners
are more than sufficient to absorb the tax hike and that there will be limited
impact on supply at lower iron ore prices.
More downside than upside to iron ore prices from current levels
The Steel Index spot iron ore price dropped by 2.7% last week to US$184.1/t
(62% Fe, dry, China CFR) and MB 63.5% Fe iron ore index fell by 4% WoW to
US$190/t. Trader sentiment remains cautious and with limited upside
potential, traders are now moving to take profits and sell down stocks.
According to Mysteel’s latest survey, mills have generally increased their
import iron ore stock in recent weeks, and inventories are higher than
average so there shouldn’t be any urgency for them to increase inventory.
Cutting FY12-13 EPS 10%; maintain SELL
We cut our FY12-13 EPS estimates for Sesa by 10% factoring in the higher
export duty. We continue to see risks of further policy negatives for Sesa Goa
going forward. Given a dearth of positive triggers for Sesa’s stock we
maintain SELL with a revised target price of Rs215.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Policy risks playing out
The hike in iron ore export duty in India’s union budget for FY12
highlights the high level of regulatory and policy risks that engulf Sesa’s
stock. With this hike, our FY12-13 EPS estimates decline ~10%, buffered
slightly by higher profit forecasts for Cairn India by CLSA’s oil & gas team.
Our sum-of-parts target price drops to Rs215 – 17% downside. With iron
ore prices likely to head south in coming months (as per CLSA’s resources
team) and Sesa still not getting any incremental approval for increasing
mining output, we see little reason for a reversal of the stock’s
underperformance of the last 12 months. Maintain SELL.
Iron ore export duty hiked
The Indian government has hiked export duty on iron ore fines from 5% to
20% and on iron ore lumps from 15% to 20%. Export duty on iron ore pellets
has been cut to 0% to incentivize iron ore producers to carry out valueaddition
to pellet stage.
Iron ore prices not likely to see a boost from this
CLSA’s commodity strategist – Ian Roper – says that the hike in export duty is
not likely to have any positive effect on spot iron ore prices given that Indian
miners enjoy a low cost structure. He believes that margins of Indian miners
are more than sufficient to absorb the tax hike and that there will be limited
impact on supply at lower iron ore prices.
More downside than upside to iron ore prices from current levels
The Steel Index spot iron ore price dropped by 2.7% last week to US$184.1/t
(62% Fe, dry, China CFR) and MB 63.5% Fe iron ore index fell by 4% WoW to
US$190/t. Trader sentiment remains cautious and with limited upside
potential, traders are now moving to take profits and sell down stocks.
According to Mysteel’s latest survey, mills have generally increased their
import iron ore stock in recent weeks, and inventories are higher than
average so there shouldn’t be any urgency for them to increase inventory.
Cutting FY12-13 EPS 10%; maintain SELL
We cut our FY12-13 EPS estimates for Sesa by 10% factoring in the higher
export duty. We continue to see risks of further policy negatives for Sesa Goa
going forward. Given a dearth of positive triggers for Sesa’s stock we
maintain SELL with a revised target price of Rs215.
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