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Sesa Goa 4QFY11 adjusted PAT grew 20% YoY to Rs14.6b. This was below our estimate of Rs15.3b mainly due to
a higher tax rate, as the company could not avail of EOU benefits in Karnataka due to an export ban over the past
three quarters. The operating performance was better than our estimates.
Net sales increased 50% YoY to Rs36.2b, higher than our estimate of Rs31.4b, due to higher iron ore realization.
Sales tonnage rose 2% YoY to 7.53mt, in line with our expectations.
Average realizations rose 53% YoY to Rs4,680/ton (higher than our estimates of Rs4,026/ton). Iron ore revenue grew
56% YoY to Rs35.2b.
EPS upgraded due to Cairn stake acquisition; FY12 EPS to decline; maintain Buy
Sesa Goa acquired 200m shares in Cairn India from Petronas for Rs331/share, amounting to 10.4% stake in Cairn
for Rs66.2b, which is in addition to an ongoing open offer.
We have incorporated profits from the associate of Rs9.6b in FY12 and Rs10.3b in FY13 for the Cairn investment.
Sesa Industries merged with Sesa Goa after a Supreme Court decision, dated 7 February 2011, with effect from 1
April 2005. As a result, the number of shares increased by 9.398m to 869.1m, up 1.1%.
Despite a 17% EPS accretion from the Cairn investment, we expect overall EPS in FY12 to fall 12% YoY, as the full
impact of higher rail freight and enhanced export duty are yet to hit earnings.
The stock trades at FY12E P/E of 7.5x and EV/EBITDA of 6.5x. Maintain Buy with a target price of Rs367 (Rs304
for core business based on 6x FY12E EV/EBITDA + Rs63 for investments discounted by 20%).
EBIT/ton up 38% YoY; 32.7mt of reserves added in FY11
In 4QFY11 iron ore EBIT grew 40% YoY to Rs20.4b.
Despite higher-than-estimated iron ore realization (by Rs654/ton), margins were only
Rs211/ton higher than our estimates. EBIT/ton increased 38% YoY to Rs2,706/ton
due to high transport costs in the quarter.
Despite higher iron ore prices, average royalty fell by Rs50/wmt QoQ to Rs175/ton
due to the addition of new slabs for lower grade ore.
Unallocated capital as of 31 March 2011 was Rs100.4b and cash and equivalents
were Rs106.8b.
Sesa Goa declared a 350% dividend for FY11 or Rs3.5 per equity share of face value
of Rs1 each and payout of 8.3%.
Sesa Goa added 53mt of reserves and resources (R&R) on a gross basis to its Goa
and Karnataka operations. Thus R&R increased from 274mt at the end of FY10 to
306mt at the end of FY11.
Concall highlights: Volume growth depends on early implementation of order
on Karnataka export ban
4QFY11 iron ore shipments of 7.53mt (wmt) included 6.66mt from Goa, 550k tons
from Karnataka and 280k tons from Orissa.
Although the Supreme Court has ruled favorably on the iron ore export ban in Karnataka,
exports have not yet begun as various permits from the state government are pending.
If the export ban is lifted immediately, the management expects 15-20% volume growth
in FY12 (excluding Orissa operations). However, we estimate 22mt of iron ore volumes
in FY12. Total iron ore inventory at the end of FY11 was 2mt in Karnataka.
Half of the FY11 sales volumes was on a spot basis. The remaining 50% was on a
long-term contract basis, of which, 34% was on real-time pricing and rest on quarterly
pricing. Practically, the average pricing is very close to spot pricing.
The average tax guidance has been maintained at 28-29% in FY12 as EOU benefits
in Karnataka ended in March 2011.
The effective ad valorem royalty rate in 4QFY11 was ~Rs175/ton or a decline of
nearly 20% QoQ due to better classification of iron ore by the Karnataka government
at the time of levying the duty.
EPS upgraded 17% on Cairn stake acquisition; FY12 EPS to fall 12%; maintain
Buy
Sesa Goa acquired 200m shares in Cairn India from Petronas at Rs331/share amounting
to 10.4% stake in Cairn for Rs66.2b, which is in addition to the ongoing open offer.
The open offer to acquire 20% stake in Cairn India on behalf of Vedanta plc, as a
person acting in concert, will close on 30 April 2011.
We have incorporated profits from the associate of Rs9.6b in FY12 and Rs10.3b in
FY13 for the Cairn investment (from our oil and gas team's Cairn earnings estimates
at crude prices of US$90/bbl). We have correspondingly reduced cash and other income.
Sesa Industries merged with Sesa Goa after a Supreme Court decision, dated Feb 7,
2011, with effect from 1 April 2005. As a result, the number of shares has increased
by 9.398m to 869.1m, an increase of 1.1%. Consequently, the minority interest has
been eliminated.
Despite 17% EPS accretion from the Cairn investment, we expect FY12 EPS to
decline 12% over FY11, as the full impact of higher rail freight and enhanced duty are
yet to hit earnings.
The stock trades at FY12E P/E of 7.5x and EV/EBITDA of 6.5x. Maintain Buy with
a target price of Rs367 (Rs304 for core business based on 6x FY12E EV/EBITDA +
Rs63 for investments discounted by 20%).
Company description
Sesa Goa has iron ore reserves and resources of 306mt in
Goa and Karnataka. Goa's ore is medium grade and easy
to extract without blasting and crushing. The iron ore from
Karnataka is of high grade but is found in rocky form, which
necessitates blasting and crushing. Sesa Goa is India's
largest private sector iron ore exporter.
Key investment arguments
Sesa Goa aims to grow inorganically and organically.
Iron ore volumes are expected to grow from 20.3mt in
FY11 to 40mt in 2-3 years.
The cost of mining and transport is significantly lower
in Goa compared with mines in Karnataka and Orissa.
The company has a strong focus on increasing reserves
over 2-3 years from the existing 306mt.
Indian miners are at an advantage over Brazilian miners
due to their proximity to China, the largest customer.
Key investment risks
Unexpected softening of spot prices of iron ore, led by
a slowdown in steel demand will adversely impact
earnings.
Recent developments
The Supreme Court lifted a ban on iron ore shipments
from Karnataka.
Valuation and view
The stock trades at FY12E P/E of 7.5x and EV/
EBITDA of 6.5x. Maintain Buy.
Sector view
Demand for iron ore is strong, driven largely by pig
iron production growth in China. Though Chinese iron
ore production is growing, the average grade is falling
every year. As a result, China is becoming increasingly
dependent on imports. The cost of iron ore production
is high for marginal producers in China due to
deteriorating grade, and in India, due to high logistic
costs.
Global supply is expected to be tight till 2012 due to a
shortage of new capacities and low supply from India
in the global seaborne market. FOB realizations are
even better due to crashing sea freight rates. As Indian
steel production grows, iron ore exports are likely to
stagnate or decline. Supplies in Australia, Brazil and
South Africa are consolidated. We are positive on
outlook of iron ore prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa 4QFY11 adjusted PAT grew 20% YoY to Rs14.6b. This was below our estimate of Rs15.3b mainly due to
a higher tax rate, as the company could not avail of EOU benefits in Karnataka due to an export ban over the past
three quarters. The operating performance was better than our estimates.
Net sales increased 50% YoY to Rs36.2b, higher than our estimate of Rs31.4b, due to higher iron ore realization.
Sales tonnage rose 2% YoY to 7.53mt, in line with our expectations.
Average realizations rose 53% YoY to Rs4,680/ton (higher than our estimates of Rs4,026/ton). Iron ore revenue grew
56% YoY to Rs35.2b.
EPS upgraded due to Cairn stake acquisition; FY12 EPS to decline; maintain Buy
Sesa Goa acquired 200m shares in Cairn India from Petronas for Rs331/share, amounting to 10.4% stake in Cairn
for Rs66.2b, which is in addition to an ongoing open offer.
We have incorporated profits from the associate of Rs9.6b in FY12 and Rs10.3b in FY13 for the Cairn investment.
Sesa Industries merged with Sesa Goa after a Supreme Court decision, dated 7 February 2011, with effect from 1
April 2005. As a result, the number of shares increased by 9.398m to 869.1m, up 1.1%.
Despite a 17% EPS accretion from the Cairn investment, we expect overall EPS in FY12 to fall 12% YoY, as the full
impact of higher rail freight and enhanced export duty are yet to hit earnings.
The stock trades at FY12E P/E of 7.5x and EV/EBITDA of 6.5x. Maintain Buy with a target price of Rs367 (Rs304
for core business based on 6x FY12E EV/EBITDA + Rs63 for investments discounted by 20%).
EBIT/ton up 38% YoY; 32.7mt of reserves added in FY11
In 4QFY11 iron ore EBIT grew 40% YoY to Rs20.4b.
Despite higher-than-estimated iron ore realization (by Rs654/ton), margins were only
Rs211/ton higher than our estimates. EBIT/ton increased 38% YoY to Rs2,706/ton
due to high transport costs in the quarter.
Despite higher iron ore prices, average royalty fell by Rs50/wmt QoQ to Rs175/ton
due to the addition of new slabs for lower grade ore.
Unallocated capital as of 31 March 2011 was Rs100.4b and cash and equivalents
were Rs106.8b.
Sesa Goa declared a 350% dividend for FY11 or Rs3.5 per equity share of face value
of Rs1 each and payout of 8.3%.
Sesa Goa added 53mt of reserves and resources (R&R) on a gross basis to its Goa
and Karnataka operations. Thus R&R increased from 274mt at the end of FY10 to
306mt at the end of FY11.
Concall highlights: Volume growth depends on early implementation of order
on Karnataka export ban
4QFY11 iron ore shipments of 7.53mt (wmt) included 6.66mt from Goa, 550k tons
from Karnataka and 280k tons from Orissa.
Although the Supreme Court has ruled favorably on the iron ore export ban in Karnataka,
exports have not yet begun as various permits from the state government are pending.
If the export ban is lifted immediately, the management expects 15-20% volume growth
in FY12 (excluding Orissa operations). However, we estimate 22mt of iron ore volumes
in FY12. Total iron ore inventory at the end of FY11 was 2mt in Karnataka.
Half of the FY11 sales volumes was on a spot basis. The remaining 50% was on a
long-term contract basis, of which, 34% was on real-time pricing and rest on quarterly
pricing. Practically, the average pricing is very close to spot pricing.
The average tax guidance has been maintained at 28-29% in FY12 as EOU benefits
in Karnataka ended in March 2011.
The effective ad valorem royalty rate in 4QFY11 was ~Rs175/ton or a decline of
nearly 20% QoQ due to better classification of iron ore by the Karnataka government
at the time of levying the duty.
EPS upgraded 17% on Cairn stake acquisition; FY12 EPS to fall 12%; maintain
Buy
Sesa Goa acquired 200m shares in Cairn India from Petronas at Rs331/share amounting
to 10.4% stake in Cairn for Rs66.2b, which is in addition to the ongoing open offer.
The open offer to acquire 20% stake in Cairn India on behalf of Vedanta plc, as a
person acting in concert, will close on 30 April 2011.
We have incorporated profits from the associate of Rs9.6b in FY12 and Rs10.3b in
FY13 for the Cairn investment (from our oil and gas team's Cairn earnings estimates
at crude prices of US$90/bbl). We have correspondingly reduced cash and other income.
Sesa Industries merged with Sesa Goa after a Supreme Court decision, dated Feb 7,
2011, with effect from 1 April 2005. As a result, the number of shares has increased
by 9.398m to 869.1m, an increase of 1.1%. Consequently, the minority interest has
been eliminated.
Despite 17% EPS accretion from the Cairn investment, we expect FY12 EPS to
decline 12% over FY11, as the full impact of higher rail freight and enhanced duty are
yet to hit earnings.
The stock trades at FY12E P/E of 7.5x and EV/EBITDA of 6.5x. Maintain Buy with
a target price of Rs367 (Rs304 for core business based on 6x FY12E EV/EBITDA +
Rs63 for investments discounted by 20%).
Company description
Sesa Goa has iron ore reserves and resources of 306mt in
Goa and Karnataka. Goa's ore is medium grade and easy
to extract without blasting and crushing. The iron ore from
Karnataka is of high grade but is found in rocky form, which
necessitates blasting and crushing. Sesa Goa is India's
largest private sector iron ore exporter.
Key investment arguments
Sesa Goa aims to grow inorganically and organically.
Iron ore volumes are expected to grow from 20.3mt in
FY11 to 40mt in 2-3 years.
The cost of mining and transport is significantly lower
in Goa compared with mines in Karnataka and Orissa.
The company has a strong focus on increasing reserves
over 2-3 years from the existing 306mt.
Indian miners are at an advantage over Brazilian miners
due to their proximity to China, the largest customer.
Key investment risks
Unexpected softening of spot prices of iron ore, led by
a slowdown in steel demand will adversely impact
earnings.
Recent developments
The Supreme Court lifted a ban on iron ore shipments
from Karnataka.
Valuation and view
The stock trades at FY12E P/E of 7.5x and EV/
EBITDA of 6.5x. Maintain Buy.
Sector view
Demand for iron ore is strong, driven largely by pig
iron production growth in China. Though Chinese iron
ore production is growing, the average grade is falling
every year. As a result, China is becoming increasingly
dependent on imports. The cost of iron ore production
is high for marginal producers in China due to
deteriorating grade, and in India, due to high logistic
costs.
Global supply is expected to be tight till 2012 due to a
shortage of new capacities and low supply from India
in the global seaborne market. FOB realizations are
even better due to crashing sea freight rates. As Indian
steel production grows, iron ore exports are likely to
stagnate or decline. Supplies in Australia, Brazil and
South Africa are consolidated. We are positive on
outlook of iron ore prices.
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