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India Equity Research Reports, IPO and Stock News
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The regulatory environment is clearly against Sesa's main operations, ie iron ore mining for
export, and steps such as a proposal to hike export duty and export bans favour a shift to
integration of steel-making by miners. We see JSW Steel as a strategic fit for Sesa and feel it
should abandon its minority pursuit of Cairn.
Exports banned, export duty raised, railway freight increased
After a ban on iron ore exports in Karnataka, the states of Orissa and Chhattisgarh too are
seeking Central government permission for export bans. These may not hold up to legal
scrutiny and could be reversed but it indicates the negative climate that mining businesses in
general face. The Union Budget has delivered another blow by proposing that export duty on
fines be raised from 5% to 20%, which impacts Sesa Goa’s earnings by 9% pa, which we
now factor in. Meanwhile, the Goa government appears content so far to collect royalties but
is yet to approve a new mining policy that would allow ramp-up of Sesa’s mining operations.
JSW Steel appears to be a strategic fit for Sesa; poor investor feedback for Cairn
Against this challenging backdrop, we believe that Sesa Goa should venture into steelmaking
and that the company should buy (at the right price) ready assets to save years of effort. We
believe Sesa should buy JSW Steel and abandon its bid for Cairn. JSW Steel is all set to
complete the expansion of its plant in Vijayanagar (in Karnataka; from 7mt to 10mt) and
acquisition of Ispat Industries. Consequently, we believe JSW will have to buy 15-16mt of
iron ore annually from the open market based on a mix of spot and long-term contracts. Sesa
Goa, meanwhile, sells similar quantities of iron ore (adjusted for Fe content) from its Goa and
Karnataka mines. We believe Sesa would create huge value for itself and JSW by buying the
steel company. In our view, due to 1) geographic proximity, and 2) JSW Steel being the only
Indian company of its size without access to captive iron ore, most investors in Sesa believe
that although Cairn is a good asset, it would be valued at a discount (because of Sesa’s minority
stake) and is not a strategic fit.
Downgrading estimates; maintain Buy with a target price of Rs380 (from Rs417)
We factor in the hike in export duties on fines announced in the Union Budget. We also lower our
iron ore sales volume assumption by 6%/10% for FY12/13 but increase average realisation
estimates to US$99/tonne and US$92/tonne, reducing earnings 11%/15%, respectively. We
maintain Buy with a new target price of Rs380.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The regulatory environment is clearly against Sesa's main operations, ie iron ore mining for
export, and steps such as a proposal to hike export duty and export bans favour a shift to
integration of steel-making by miners. We see JSW Steel as a strategic fit for Sesa and feel it
should abandon its minority pursuit of Cairn.
Exports banned, export duty raised, railway freight increased
After a ban on iron ore exports in Karnataka, the states of Orissa and Chhattisgarh too are
seeking Central government permission for export bans. These may not hold up to legal
scrutiny and could be reversed but it indicates the negative climate that mining businesses in
general face. The Union Budget has delivered another blow by proposing that export duty on
fines be raised from 5% to 20%, which impacts Sesa Goa’s earnings by 9% pa, which we
now factor in. Meanwhile, the Goa government appears content so far to collect royalties but
is yet to approve a new mining policy that would allow ramp-up of Sesa’s mining operations.
JSW Steel appears to be a strategic fit for Sesa; poor investor feedback for Cairn
Against this challenging backdrop, we believe that Sesa Goa should venture into steelmaking
and that the company should buy (at the right price) ready assets to save years of effort. We
believe Sesa should buy JSW Steel and abandon its bid for Cairn. JSW Steel is all set to
complete the expansion of its plant in Vijayanagar (in Karnataka; from 7mt to 10mt) and
acquisition of Ispat Industries. Consequently, we believe JSW will have to buy 15-16mt of
iron ore annually from the open market based on a mix of spot and long-term contracts. Sesa
Goa, meanwhile, sells similar quantities of iron ore (adjusted for Fe content) from its Goa and
Karnataka mines. We believe Sesa would create huge value for itself and JSW by buying the
steel company. In our view, due to 1) geographic proximity, and 2) JSW Steel being the only
Indian company of its size without access to captive iron ore, most investors in Sesa believe
that although Cairn is a good asset, it would be valued at a discount (because of Sesa’s minority
stake) and is not a strategic fit.
Downgrading estimates; maintain Buy with a target price of Rs380 (from Rs417)
We factor in the hike in export duties on fines announced in the Union Budget. We also lower our
iron ore sales volume assumption by 6%/10% for FY12/13 but increase average realisation
estimates to US$99/tonne and US$92/tonne, reducing earnings 11%/15%, respectively. We
maintain Buy with a new target price of Rs380.
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