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UBS Investment Research
Sesa Goa
Karnataka iron ore export ban lifted
Event: export ban lifted—positive for Sesa, marginal impact on NMDC
Yesterday, the Supreme Court of India lifted the iron ore export ban effective
20 April 2011. The ban has been in place in Karnataka since August 2010. We
believe this is significantly positive for Sesa Goa (Sesa) as it has 6 mtpa of iron ore
capacity in the state.
Impact: marginal near term on iron ore prices; remain positive on iron ore
The most active period for India’s seaborne trade (November-March) has passed
and there are only a few weeks of trade left before the monsoon season begins.
Hence, we believe there will not be a significant impact on the spot market in the
near term. We are positive on iron ore prices and have assumed US$165/155 for
FY12/13 for 63.5% Fe CFR China.
Action: raising FY12/13 volume and earnings estimates for Sesa Goa
For Sesa, we now factor in iron ore sales volume of 24.3/29.4 mtpa (vs 20.3/23.7
mtpa earlier). We had not factored in any sale from Karnataka earlier. We now also
factor in a higher acquisition cost for a 20% stake in Cairn India at Rs405 per share
(vs Rs355 earlier). Accordingly, we raise our FY12/13 EPS estimates 16%/20% to
Rs41.1/41.5. We do not expect any major impact on NMDC as its export volumes
from Karnataka are less than 1% of its overall volumes.
Valuation: maintain Buy rating, raise price target from Rs333 to Rs400
We continue to value Sesa on a sum-of-the-parts basis, with its businesses (iron ore
and others) valued at 4.5x EV/EBITDA (FY13E EBITDA) and Cairn India at a
20% discount to our price target of Rs415. We raise our price target for Sesa 20%
to Rs400 due to our higher volume estimates. We maintain our Sell rating on
NMDC with a price target of Rs210.
Sesa Goa—raise our earnings estimates
We now factor in iron ore sales volume of 25/29 mtpa (vs 20/24 mtpa earlier).
We had not factored in any sale from Karnataka earlier.
We also factor in a higher acquisition cost for a 20% stake in Cairn India at
Rs405 per share (vs Rs355 earlier), which increases our net debt estimate by
Rs19bn. Consequently, our interest expense forecast increases.
Based on the above, we raise our EPS estimates for FY12/13 16%/20% to
Rs41.1/41.5.
Valuation—Sesa Goa
We maintain our Buy rating on Sesa with a higher price target of Rs400
(previously Rs333) as we raise our sales volume and earnings estimates. We
continue to value Sesa on 4.5x EV/EBITDA (FY13E EBITDA). We value the
20% stake in Cairn India at UBS’s SOTP price target of Rs415 and apply a 20%
holding company discount.
Our bear-case valuation for Sesa (assuming a higher royalty of 20% instead of
current 10%) would be Rs327/share.
Bear-case valuation scenario
Recent media reports indicate that the government may increase the royalty rate
(currently 10% ad valorem) instead of imposing a 26% mining tax profit. If we
assume the royalty rate increases to 20% (instead of 10%), Sesa Goa’s EPS for
FY12/13 would decline to Rs33/32 and the valuation would decline to Rs327.
Table 4: Valuation—bear case scenario
Rs m
EBITDA - March 2013 47,838
Target EV/EBITDA multiple (x) 4.5
Target EV 215,269
Net cash - March 2012 (61,636)
Target Market Cap ex-stake in Cairn India 153,632
Price target for core business (Rs/share) 179
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 415
Value of stake in Cairn India 159,352
Less: Holding company discount (20%) 31,870
Target value of stake in Cairn India (Rs/share) 127,481
Valuation of Cairn India stake 148
Valuation (Rs/share) 327
Source: UBS estimates
NMDC valuation: maintain Sell rating and price
target of Rs210
Our price target of Rs210 is based on a sum-of-the-parts valuation: we value the
iron ore business using NPV and the steel business on book value of investments
as at FY11E). We assume a WACC of 12.6%.
Impact on the seaborne iron ore market
The most active period for India’s seaborne trade (November-March) has passed
and there are only a few weeks of trade left before the monsoon season starts.
Hence, we believe there will not be a significant impact on the spot market in
the near term.
Post monsoons, there could be some negative impact on iron ore prices.
However, the Chinese social housing impetus from July-September onwards
should provide support to the steel sector in China (incremental steel demand of
30-35 mtpa) and consequently to iron ore demand (incremental 50-58mt).
Global valuations
We believe NMDC remains one of the most expensive iron ore stocks globally
on all parameters.
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 that 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 forecasts, earnings and valuation under pressure.
Investment in Sesa is subject to China risk, given the majority of forecast iron
ore growth is from China.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sesa Goa
Karnataka iron ore export ban lifted
Event: export ban lifted—positive for Sesa, marginal impact on NMDC
Yesterday, the Supreme Court of India lifted the iron ore export ban effective
20 April 2011. The ban has been in place in Karnataka since August 2010. We
believe this is significantly positive for Sesa Goa (Sesa) as it has 6 mtpa of iron ore
capacity in the state.
Impact: marginal near term on iron ore prices; remain positive on iron ore
The most active period for India’s seaborne trade (November-March) has passed
and there are only a few weeks of trade left before the monsoon season begins.
Hence, we believe there will not be a significant impact on the spot market in the
near term. We are positive on iron ore prices and have assumed US$165/155 for
FY12/13 for 63.5% Fe CFR China.
Action: raising FY12/13 volume and earnings estimates for Sesa Goa
For Sesa, we now factor in iron ore sales volume of 24.3/29.4 mtpa (vs 20.3/23.7
mtpa earlier). We had not factored in any sale from Karnataka earlier. We now also
factor in a higher acquisition cost for a 20% stake in Cairn India at Rs405 per share
(vs Rs355 earlier). Accordingly, we raise our FY12/13 EPS estimates 16%/20% to
Rs41.1/41.5. We do not expect any major impact on NMDC as its export volumes
from Karnataka are less than 1% of its overall volumes.
Valuation: maintain Buy rating, raise price target from Rs333 to Rs400
We continue to value Sesa on a sum-of-the-parts basis, with its businesses (iron ore
and others) valued at 4.5x EV/EBITDA (FY13E EBITDA) and Cairn India at a
20% discount to our price target of Rs415. We raise our price target for Sesa 20%
to Rs400 due to our higher volume estimates. We maintain our Sell rating on
NMDC with a price target of Rs210.
Sesa Goa—raise our earnings estimates
We now factor in iron ore sales volume of 25/29 mtpa (vs 20/24 mtpa earlier).
We had not factored in any sale from Karnataka earlier.
We also factor in a higher acquisition cost for a 20% stake in Cairn India at
Rs405 per share (vs Rs355 earlier), which increases our net debt estimate by
Rs19bn. Consequently, our interest expense forecast increases.
Based on the above, we raise our EPS estimates for FY12/13 16%/20% to
Rs41.1/41.5.
Valuation—Sesa Goa
We maintain our Buy rating on Sesa with a higher price target of Rs400
(previously Rs333) as we raise our sales volume and earnings estimates. We
continue to value Sesa on 4.5x EV/EBITDA (FY13E EBITDA). We value the
20% stake in Cairn India at UBS’s SOTP price target of Rs415 and apply a 20%
holding company discount.
Our bear-case valuation for Sesa (assuming a higher royalty of 20% instead of
current 10%) would be Rs327/share.
Bear-case valuation scenario
Recent media reports indicate that the government may increase the royalty rate
(currently 10% ad valorem) instead of imposing a 26% mining tax profit. If we
assume the royalty rate increases to 20% (instead of 10%), Sesa Goa’s EPS for
FY12/13 would decline to Rs33/32 and the valuation would decline to Rs327.
Table 4: Valuation—bear case scenario
Rs m
EBITDA - March 2013 47,838
Target EV/EBITDA multiple (x) 4.5
Target EV 215,269
Net cash - March 2012 (61,636)
Target Market Cap ex-stake in Cairn India 153,632
Price target for core business (Rs/share) 179
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 415
Value of stake in Cairn India 159,352
Less: Holding company discount (20%) 31,870
Target value of stake in Cairn India (Rs/share) 127,481
Valuation of Cairn India stake 148
Valuation (Rs/share) 327
Source: UBS estimates
NMDC valuation: maintain Sell rating and price
target of Rs210
Our price target of Rs210 is based on a sum-of-the-parts valuation: we value the
iron ore business using NPV and the steel business on book value of investments
as at FY11E). We assume a WACC of 12.6%.
Impact on the seaborne iron ore market
The most active period for India’s seaborne trade (November-March) has passed
and there are only a few weeks of trade left before the monsoon season starts.
Hence, we believe there will not be a significant impact on the spot market in
the near term.
Post monsoons, there could be some negative impact on iron ore prices.
However, the Chinese social housing impetus from July-September onwards
should provide support to the steel sector in China (incremental steel demand of
30-35 mtpa) and consequently to iron ore demand (incremental 50-58mt).
Global valuations
We believe NMDC remains one of the most expensive iron ore stocks globally
on all parameters.
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 that 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 forecasts, earnings and valuation under pressure.
Investment in Sesa is subject to China risk, given the majority of forecast iron
ore growth is from China.
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