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Sesa Goa reported its 4QFY11 production results today. Production volumes were at 6.2mt while
sales volumes were at 7.5mt, well above our expectations. Management reiterated sales
guidance of 25mt for FY12 including 7-8mt from Karnataka.
Robust production volume of 6.2mt
Production of iron ore was 6.24mt (-21% yoy and +34% qoq) on a wet metric tonne (WMT)
basis. The strong qoq jump was expected, 4QFY11 being seasonally the strongest. The yoy
fall was due to the export ban in Karnataka as well as the closure of the Thakurani mine in
Orissa in December 2010. Production for FY11 was marginally lower yoy at 21.1mt.
Stronger-than-expected sales volume; not entirely a surprise
Sales volumes of iron ore were strong at 7.53mt (WMT basis) (+2% yoy and +40% qoq), well
over the 5.9mt we estimated. The higher-than-modeled sales volume does not entirely come
as a surprise since Sesa was sitting on inventory of 5.1mt at the end of the December
quarter. With the export duty hike to 20% taking effect from 1 April, the company had a strong
incentive to liquidate as much of the inventory as possible. Out of the total sales for the
quarter, 0.5mt sales came from Karnataka (all in the domestic market due to the export ban),
0.25mt of left-over inventory was liquidated from Orissa while remaining volumes came from
Goa (all exported). Sales for FY11 were 20.5mt (flat yoy).
Expansion programmes on track
Management highlighted that the iron ore capacity expansion programme is on track for
completion by end of FY13. Karnataka's mining capacity is set to be increased to 10mt (from
6mt currently) while Goa's capacity is targeted to go up to 30mt from 16mt currently, pending
the State's new mining policy. Expansion of the pig iron capacity to 625kt and the associated
expansion of metallurgical coke capacity to 560kt are progressing well and on track to be
commissioned by 3QFY12.
Iron ore exports from Karnataka to resume
Management was confident that the interim order of the Supreme Court on lifting of the
Karnataka export ban from 20 April would be upheld when the court meets again in May. With
the ban now lifted, volumes are expected to pick up from Karnataka. We note that incremental
3mt of volumes from Karnataka could add US$150mn to EBITDA. (15% of FY12F earnings).
Inventory itself in Karnataka was 2.3mt at the end of the December quarter.
Steel, an enabler to expand mining business
Management noted that it is open to steel assets, though it sees it more as an enabler to
expand the core mining business. The acquisition of the half-constructed 0.5mt Bellary steel
plant is in that direction. Management is currently evaluating the asset.
Reiterates sales volume guidance of 25mt for FY12
Management reiterated sales volume guidance of 25mt (WMT basis) for FY12 with 7-8mt
from Karnataka, contingent on exports resumption. We note that we have modeled 20mt and
22mt for FY12 and FY13 respectively.
We have a Buy rating on Sesa Goa with target price of Rs380.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa reported its 4QFY11 production results today. Production volumes were at 6.2mt while
sales volumes were at 7.5mt, well above our expectations. Management reiterated sales
guidance of 25mt for FY12 including 7-8mt from Karnataka.
Robust production volume of 6.2mt
Production of iron ore was 6.24mt (-21% yoy and +34% qoq) on a wet metric tonne (WMT)
basis. The strong qoq jump was expected, 4QFY11 being seasonally the strongest. The yoy
fall was due to the export ban in Karnataka as well as the closure of the Thakurani mine in
Orissa in December 2010. Production for FY11 was marginally lower yoy at 21.1mt.
Stronger-than-expected sales volume; not entirely a surprise
Sales volumes of iron ore were strong at 7.53mt (WMT basis) (+2% yoy and +40% qoq), well
over the 5.9mt we estimated. The higher-than-modeled sales volume does not entirely come
as a surprise since Sesa was sitting on inventory of 5.1mt at the end of the December
quarter. With the export duty hike to 20% taking effect from 1 April, the company had a strong
incentive to liquidate as much of the inventory as possible. Out of the total sales for the
quarter, 0.5mt sales came from Karnataka (all in the domestic market due to the export ban),
0.25mt of left-over inventory was liquidated from Orissa while remaining volumes came from
Goa (all exported). Sales for FY11 were 20.5mt (flat yoy).
Expansion programmes on track
Management highlighted that the iron ore capacity expansion programme is on track for
completion by end of FY13. Karnataka's mining capacity is set to be increased to 10mt (from
6mt currently) while Goa's capacity is targeted to go up to 30mt from 16mt currently, pending
the State's new mining policy. Expansion of the pig iron capacity to 625kt and the associated
expansion of metallurgical coke capacity to 560kt are progressing well and on track to be
commissioned by 3QFY12.
Iron ore exports from Karnataka to resume
Management was confident that the interim order of the Supreme Court on lifting of the
Karnataka export ban from 20 April would be upheld when the court meets again in May. With
the ban now lifted, volumes are expected to pick up from Karnataka. We note that incremental
3mt of volumes from Karnataka could add US$150mn to EBITDA. (15% of FY12F earnings).
Inventory itself in Karnataka was 2.3mt at the end of the December quarter.
Steel, an enabler to expand mining business
Management noted that it is open to steel assets, though it sees it more as an enabler to
expand the core mining business. The acquisition of the half-constructed 0.5mt Bellary steel
plant is in that direction. Management is currently evaluating the asset.
Reiterates sales volume guidance of 25mt for FY12
Management reiterated sales volume guidance of 25mt (WMT basis) for FY12 with 7-8mt
from Karnataka, contingent on exports resumption. We note that we have modeled 20mt and
22mt for FY12 and FY13 respectively.
We have a Buy rating on Sesa Goa with target price of Rs380.
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