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Sesa Goa (SESA)
Metals & Mining
Broadly in line. 4QFY11 EBITDA of Rs21.2 bn (+40.9% yoy) was 4% ahead of our
estimate on higher iron ore shipments. Net income of Rs14.6 bn was 16.6% below our
estimate on higher-than-expected tax rate. Sesa announced 53 mn tonnes of gross
addition to reserves and resources—our TP is based on 80 mn tonnes accretion to R&R
over the mine life. Seemingly inexpensive valuations of Sesa have to be viewed against
the backdrop of limited mine life, regulatory uncertainties and peak-cycle prices for iron
ore. REDUCE—poor utilization of excess cash is an additional source of concern.
Operational performance in line, tonnages higher than expected
Sesa’s 4QFY11 EBITDA of Rs21.2 bn (+72.1% qoq, +40.9% yoy) was 4% ahead of our estimate of
Rs20.3 bn, primarily on higher iron ore shipments. Iron ore deliveries of 7.5 mn wet metric tonnes
(wmt) was 8.3% ahead of our estimate of 6.9 mn wmt. Iron ore realizations increased 16.8%
sequentially to US$101/tonne in line with our estimate and on the back of favorable iron ore prices
in the quarter. Net income of Rs14.6 bn (+37.2%qoq, +20.5% yoy) was 16.6% lower than our
estimate of Rs17.5 bn on the back of higher tax outgo during the quarter. The effective tax rate
for 4QFY11 was surprisingly high at 34.7% as against 19.4% in 3QFY11 and our estimate of 18%.
Iron ore EBITDA of US$61/tonne increased 41.7% yoy and was in line with our estimate.
Sesa’s 4QFY11 pig iron production of 65 kt (+3.2%qoq, -7.1% yoy) was 5.8% below our estimate
of 68 kt. Average pig iron realization grew 8% sequentially to Rs27,386/tonne.
R&R upgrade—good but may not lead to upside to our fair value
Sesa has announced 53 mn tonnes of addition to reserves and resources (R&R) at the gross level
and 31 mn tonnes on a net basis. We would seek management clarifications on the source of the
upgrade. Sesa’s reserves and resources stand at 306 mn tonnes at end-March 2011. We have
already modeled 80 mn tonnes accretion to reserves in our DCF-based valuation; hence this
change is unlikely to impact our fair value assumption.
Surprised with acquisition of Petronas stake in Cairn India
We are surprised by Sesa Goa’s acquisition of 10.4% stake in Cairn India from Petronas given the
prevailing uncertainty on royalty issue. Our DCF-based fair value of Rs318 on Cairn India would
reduce by Rs66/share in case Cairn India has to bear royalty proportionate to its production from
the key Rajasthan block as opposed to ONGC paying 100% of the royalty currently. Purchase of
Petronas stake at Rs331/share is in addition to open offer to acquire 20% in Cairn India from
public shareholders. Cash outflow as a result will range from Rs132 bn to Rs201 bn to acquire
20-30.4% in Cairn India. Sesa had cash and cash equivalents of Rs107 bn at end-March 2011.
Maintain REDUCE rating
We will revisit our estimates post the earnings call on April 26. We will seek clarifications on
(1) status on lifting of ban on iron ore exports by the Karnataka Government, the Supreme
Court had on April 5, 2011 granted interim relief against the ban on iron ore exports from
Karnataka. The matter is currently up for hearing in the first week of May, (2) EC status for
mine expansion program and (3) rationale for acquiring additional stake in Cairn India.
REDUCE rating stays.
Update on capacity expansion plans
The company remains on track to increase the production capacity of its pig iron operations
and metallurgical coke operations to 625 ktpa and 560 ktpa, respectively by 3QFY12E. Sesa
also intends to expand its iron ore production capacity to 40 mn tonnes by end-FY2013E—
30 mn tonnes from Goa and 10 mn tonnes from Karnataka. Sesa has environmental
clearances to mine up to 6 mtpa from the Karnataka mine, which it expects to increase to
10 mtpa by end-FY2012E. The approval for Goa mine expansion is unlikely any time soon
since the Goa Government is unlikely to take up new requests for mining expansion till new
MMDR rules are finalized.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa (SESA)
Metals & Mining
Broadly in line. 4QFY11 EBITDA of Rs21.2 bn (+40.9% yoy) was 4% ahead of our
estimate on higher iron ore shipments. Net income of Rs14.6 bn was 16.6% below our
estimate on higher-than-expected tax rate. Sesa announced 53 mn tonnes of gross
addition to reserves and resources—our TP is based on 80 mn tonnes accretion to R&R
over the mine life. Seemingly inexpensive valuations of Sesa have to be viewed against
the backdrop of limited mine life, regulatory uncertainties and peak-cycle prices for iron
ore. REDUCE—poor utilization of excess cash is an additional source of concern.
Operational performance in line, tonnages higher than expected
Sesa’s 4QFY11 EBITDA of Rs21.2 bn (+72.1% qoq, +40.9% yoy) was 4% ahead of our estimate of
Rs20.3 bn, primarily on higher iron ore shipments. Iron ore deliveries of 7.5 mn wet metric tonnes
(wmt) was 8.3% ahead of our estimate of 6.9 mn wmt. Iron ore realizations increased 16.8%
sequentially to US$101/tonne in line with our estimate and on the back of favorable iron ore prices
in the quarter. Net income of Rs14.6 bn (+37.2%qoq, +20.5% yoy) was 16.6% lower than our
estimate of Rs17.5 bn on the back of higher tax outgo during the quarter. The effective tax rate
for 4QFY11 was surprisingly high at 34.7% as against 19.4% in 3QFY11 and our estimate of 18%.
Iron ore EBITDA of US$61/tonne increased 41.7% yoy and was in line with our estimate.
Sesa’s 4QFY11 pig iron production of 65 kt (+3.2%qoq, -7.1% yoy) was 5.8% below our estimate
of 68 kt. Average pig iron realization grew 8% sequentially to Rs27,386/tonne.
R&R upgrade—good but may not lead to upside to our fair value
Sesa has announced 53 mn tonnes of addition to reserves and resources (R&R) at the gross level
and 31 mn tonnes on a net basis. We would seek management clarifications on the source of the
upgrade. Sesa’s reserves and resources stand at 306 mn tonnes at end-March 2011. We have
already modeled 80 mn tonnes accretion to reserves in our DCF-based valuation; hence this
change is unlikely to impact our fair value assumption.
Surprised with acquisition of Petronas stake in Cairn India
We are surprised by Sesa Goa’s acquisition of 10.4% stake in Cairn India from Petronas given the
prevailing uncertainty on royalty issue. Our DCF-based fair value of Rs318 on Cairn India would
reduce by Rs66/share in case Cairn India has to bear royalty proportionate to its production from
the key Rajasthan block as opposed to ONGC paying 100% of the royalty currently. Purchase of
Petronas stake at Rs331/share is in addition to open offer to acquire 20% in Cairn India from
public shareholders. Cash outflow as a result will range from Rs132 bn to Rs201 bn to acquire
20-30.4% in Cairn India. Sesa had cash and cash equivalents of Rs107 bn at end-March 2011.
Maintain REDUCE rating
We will revisit our estimates post the earnings call on April 26. We will seek clarifications on
(1) status on lifting of ban on iron ore exports by the Karnataka Government, the Supreme
Court had on April 5, 2011 granted interim relief against the ban on iron ore exports from
Karnataka. The matter is currently up for hearing in the first week of May, (2) EC status for
mine expansion program and (3) rationale for acquiring additional stake in Cairn India.
REDUCE rating stays.
Update on capacity expansion plans
The company remains on track to increase the production capacity of its pig iron operations
and metallurgical coke operations to 625 ktpa and 560 ktpa, respectively by 3QFY12E. Sesa
also intends to expand its iron ore production capacity to 40 mn tonnes by end-FY2013E—
30 mn tonnes from Goa and 10 mn tonnes from Karnataka. Sesa has environmental
clearances to mine up to 6 mtpa from the Karnataka mine, which it expects to increase to
10 mtpa by end-FY2012E. The approval for Goa mine expansion is unlikely any time soon
since the Goa Government is unlikely to take up new requests for mining expansion till new
MMDR rules are finalized.
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