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UBS Investment Research
Sesa Goa
Export duty increased but priced in
Export duty on Iron Ore lumps and fines increased to 20%
In the FY12 Union Budget speech, the FM announced an increase in iron ore
export duty to 20% on both lumps and fines from current rate of 15% and 5%
respectively. This hike was not expected. However, we believe this event is priced
in as stock has corrected c7% after the announcement today.
Lowering our FY 12/13 earnings estimates by 21%/25%
Sesa Goa exports ~ 95% of its production and the product mix between lumps and
fines is significantly skewed towards fines (c85%). We believe the company will
not be able to pass on the export duty hike; hence its margins will be negatively
impacted. We revise our FY12/13 EPS downwards by 21%/25% to Rs35.4/34.6.
We estimate export duty cost per tonne to increase by cUS$14/t resulting in
EBITDA margins to decline to 47%/41% in FY12/13 from 58%/54%.
No mention of mining tax bill in FM’s budget speech
There has been no mention of the Mining Tax Bill in the budget. Recent media
reports indicated the government may increase royalty rate (currently 10% ad
valorem) instead of imposing a 26% mining tax profit. If we assume royalty rate to
increase to 20%, our EPS estimates for FY12/13 would further decline to Rs29/27
and price target would decline to Rs280. We don’t include sales from Karnataka in
our estimates.
Valuation: Maintain Buy; Lower price target to Rs333 (from Rs410)
We continue to value Sesa on 4.5x EV/EBITDA (Dec 2012E EBITDA) – current
global average is 4.8x. We value 20% stake in Cairn India at UBS’s SOTP price
target of Rs375/sh and apply 20% holdco discount. Our price target declines as we
lower earnings estimates.
Valuations
We retain Buy on Sesa Goa but lower our price target to Rs333 (earlier Rs410)
as we lower our earnings estimates. We continue to value Sesa on 4.5x
EV/EBITDA (Dec 2012E EBITDA). We value 20% stake in Cairn India at
UBS’s SOTP price target of Rs375/sh and apply 20% holdco discount.
Table 3: Price target derivation – now
Rs m
EBITDA - Dec 2012E 48,750
Target EV/EBITDA multiple (x) 4.5
Target EV 219,374
Net debt - Dec 2011E (48,689)
Target Market Cap ex-stake in Cairn India 170,685
Price target for core business (Rs/share) 199
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 375
Value of stake in Cairn India 143,993
Less: Holding company discount (20%) 28,799
Target value of stake in Cairn India (Rs/share) 115,194
Price target for Cairn India stake 134
Price target (Rs/share) 333
Source: UBS estimates
Table 4: Price target derivation – previous
Rs m
EBITDA - Dec 2012E 62,626
Target EV/EBITDA multiple (x) 4.5
Target EV 281,817
Net debt - Dec 2011E (43,754)
Target Market Cap ex-stake in Cairn India 238,063
Price target for core business (Rs/share) 277
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 375
Value of stake in Cairn India 143,993
Less: Holding company discount (20%) 28,799
Target value of stake in Cairn India (Rs/share) 115,194
Price target for Cairn India stake 134
Price target (Rs/share) 411*
Source: UBS estimates, *Rounded off to Rs410/sh
Bear case valuation
There has been no mention of the Mining Tax Bill in the budget. Recent media
reports indicated that the government may increase royalty rate (currently 10%
ad valorem) instead of imposing a 26% mining tax profit.
If we assume royalty rate to increase to 20%, Sesa Goa’s EPS for FY12/13
would further decline to Rs29/27 and price target would decline to Rs280.
Table 5: Price target – Stress case valuation
EV/EBITDA valuation Rs m
EBITDA - Dec 2012E 39,354
Target EV/EBITDA multiple (x) 4.5
Target EV 177,092
Net debt - Dec 2011E (51,954)
Target Market Cap ex-stake in Cairn India 125,138
Price target for core business (Rs/share) 146
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 375
Value of stake in Cairn India 143,993
Less: Holding company discount (20%) 28,799
Target value of stake in Cairn India (Rs/share) 115,194
Price target for Cairn India stake 134
Price target (Rs/share) 280
Source: UBS estimates
Bull case scenario
We currently don’t factor in any sales from Karnataka in our sales forecasts.
If the export ban is revoked, it would provide significant upside potential to
our earnings estimates and price target, all else equal. Currently, Sesa Goa
has 6mt in production capacity in Karnataka. It had plans to increase
Karnataka’s capacity to 10mt.
Sesa Goa
Sesa Goa is a 51%-owned subsidiary of the Vedanta Group and was acquired
from Mitsui & Co., in 2007. Sesa is the largest listed Indian exporter of iron ore,
selling 12.3m tonnes in FY08 primarily to steel-making companies in China,
Japan and Europe. Over the past decade, Sesa has diversified into the
manufacture of pig iron and metallurgical coke via its 88.2%-owned subsidiary,
Sesa Industries Ltd.
Statement of Risk
Sesa, like all mining companies, is subject to exchange rate risk, and to price
fluctuations of its main products. Investors should be aware mining stocks
including Sesa are inherently volatile and extremely dependent on global
underlying demand and supplier behaviour. A weakening in global production
could place our pricing forecast, earnings and valuations under pressure.
Investment in Sesa is subject to China risk, given the majority of forecasted iron
ore growth is from China.
For Cairn India, oil price and regulation are the major risks to the company.
Valuation: Our Rs375 price target for Cairn India is SOTP based.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sesa Goa
Export duty increased but priced in
Export duty on Iron Ore lumps and fines increased to 20%
In the FY12 Union Budget speech, the FM announced an increase in iron ore
export duty to 20% on both lumps and fines from current rate of 15% and 5%
respectively. This hike was not expected. However, we believe this event is priced
in as stock has corrected c7% after the announcement today.
Lowering our FY 12/13 earnings estimates by 21%/25%
Sesa Goa exports ~ 95% of its production and the product mix between lumps and
fines is significantly skewed towards fines (c85%). We believe the company will
not be able to pass on the export duty hike; hence its margins will be negatively
impacted. We revise our FY12/13 EPS downwards by 21%/25% to Rs35.4/34.6.
We estimate export duty cost per tonne to increase by cUS$14/t resulting in
EBITDA margins to decline to 47%/41% in FY12/13 from 58%/54%.
No mention of mining tax bill in FM’s budget speech
There has been no mention of the Mining Tax Bill in the budget. Recent media
reports indicated the government may increase royalty rate (currently 10% ad
valorem) instead of imposing a 26% mining tax profit. If we assume royalty rate to
increase to 20%, our EPS estimates for FY12/13 would further decline to Rs29/27
and price target would decline to Rs280. We don’t include sales from Karnataka in
our estimates.
Valuation: Maintain Buy; Lower price target to Rs333 (from Rs410)
We continue to value Sesa on 4.5x EV/EBITDA (Dec 2012E EBITDA) – current
global average is 4.8x. We value 20% stake in Cairn India at UBS’s SOTP price
target of Rs375/sh and apply 20% holdco discount. Our price target declines as we
lower earnings estimates.
Valuations
We retain Buy on Sesa Goa but lower our price target to Rs333 (earlier Rs410)
as we lower our earnings estimates. We continue to value Sesa on 4.5x
EV/EBITDA (Dec 2012E EBITDA). We value 20% stake in Cairn India at
UBS’s SOTP price target of Rs375/sh and apply 20% holdco discount.
Table 3: Price target derivation – now
Rs m
EBITDA - Dec 2012E 48,750
Target EV/EBITDA multiple (x) 4.5
Target EV 219,374
Net debt - Dec 2011E (48,689)
Target Market Cap ex-stake in Cairn India 170,685
Price target for core business (Rs/share) 199
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 375
Value of stake in Cairn India 143,993
Less: Holding company discount (20%) 28,799
Target value of stake in Cairn India (Rs/share) 115,194
Price target for Cairn India stake 134
Price target (Rs/share) 333
Source: UBS estimates
Table 4: Price target derivation – previous
Rs m
EBITDA - Dec 2012E 62,626
Target EV/EBITDA multiple (x) 4.5
Target EV 281,817
Net debt - Dec 2011E (43,754)
Target Market Cap ex-stake in Cairn India 238,063
Price target for core business (Rs/share) 277
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 375
Value of stake in Cairn India 143,993
Less: Holding company discount (20%) 28,799
Target value of stake in Cairn India (Rs/share) 115,194
Price target for Cairn India stake 134
Price target (Rs/share) 411*
Source: UBS estimates, *Rounded off to Rs410/sh
Bear case valuation
There has been no mention of the Mining Tax Bill in the budget. Recent media
reports indicated that the government may increase royalty rate (currently 10%
ad valorem) instead of imposing a 26% mining tax profit.
If we assume royalty rate to increase to 20%, Sesa Goa’s EPS for FY12/13
would further decline to Rs29/27 and price target would decline to Rs280.
Table 5: Price target – Stress case valuation
EV/EBITDA valuation Rs m
EBITDA - Dec 2012E 39,354
Target EV/EBITDA multiple (x) 4.5
Target EV 177,092
Net debt - Dec 2011E (51,954)
Target Market Cap ex-stake in Cairn India 125,138
Price target for core business (Rs/share) 146
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 375
Value of stake in Cairn India 143,993
Less: Holding company discount (20%) 28,799
Target value of stake in Cairn India (Rs/share) 115,194
Price target for Cairn India stake 134
Price target (Rs/share) 280
Source: UBS estimates
Bull case scenario
We currently don’t factor in any sales from Karnataka in our sales forecasts.
If the export ban is revoked, it would provide significant upside potential to
our earnings estimates and price target, all else equal. Currently, Sesa Goa
has 6mt in production capacity in Karnataka. It had plans to increase
Karnataka’s capacity to 10mt.
Sesa Goa
Sesa Goa is a 51%-owned subsidiary of the Vedanta Group and was acquired
from Mitsui & Co., in 2007. Sesa is the largest listed Indian exporter of iron ore,
selling 12.3m tonnes in FY08 primarily to steel-making companies in China,
Japan and Europe. Over the past decade, Sesa has diversified into the
manufacture of pig iron and metallurgical coke via its 88.2%-owned subsidiary,
Sesa Industries Ltd.
Statement of Risk
Sesa, like all mining companies, is subject to exchange rate risk, and to price
fluctuations of its main products. Investors should be aware mining stocks
including Sesa are inherently volatile and extremely dependent on global
underlying demand and supplier behaviour. A weakening in global production
could place our pricing forecast, earnings and valuations under pressure.
Investment in Sesa is subject to China risk, given the majority of forecasted iron
ore growth is from China.
For Cairn India, oil price and regulation are the major risks to the company.
Valuation: Our Rs375 price target for Cairn India is SOTP based.
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