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Sesa Goa Ltd (SESA IN)
N(V): Better-than-expected results; nothing incrementally
exciting though
EBITDA at INR21bn driven by better grade rationalisation,
which is difficult to sustain over next few quarters
Nothing incrementally exciting; focus now seems to be on
value addition, where Sesa has yet to learn the ropes
Raise FY12/13 EBITDA by 4%/2% on revised iron ore price
forecasts; increase TP to INR330 (INR310); remain Neutral(V)
4Q performance and conference call highlights (see Exhibit 1 for details):
Volumes at 7.5mt were reported earlier this month, but a strong 20% q-o-q jump in
realisations surprised positively. Sesa’s iron ore realisation discount to our grade-adjusted
spot and contract-based index fell 400bp from 33% to c29%, owing to better grade
rationalisation. Revenues at INR36bn were thus up c50% y-o-y (HSBC: INR31.3bn).
EBITDA at INR21bn (+41% y-o-y, HSBC: INR18bn) was mainly top line driven, but the
export duty ‘pinch’ has begun to be felt – it was up 124% q-o-q at INR541/t.
NPAT at INR14.6bn (+20.3% y-o-y) was proportionally lower though, because of a higher
tax outgoing of INR7.7bn owing to lower provisions made in 1-3Q assuming that the
Karnataka ban will be lifted (Karnataka operations have an EOU status and lower tax rates).
Management has guided for 15-20% volume growth in FY12, but this assumes 3-4mt
of permits being granted in Karnataka.
Nothing incrementally exciting: Sesa added c32mt of reserves and resources (net) in FY11,
lower than 43mt in FY10. With the acquisition of Bellary Steel & Alloys, market buzz
(Economic Times article) on the Welspun plant acquisition and renewed focus on the
Jharkhand steel project, incremental focus seems to be on steel making, a business where Sesa
has yet to build expertise.
Raise FY12/13 estimates, based on revised HSBC commodity price forecasts: We raise
our FY12/13e EBITDA by 4%/2% based on revised iron ore prices (Metals & Mining
Chartbook 2Q11, 19 April). We mentioned in Budget 2012: iron ore taxes increased; negative
for ore exporters, 1 March, that given the increase in export duty on fines, Indian iron ore
producers are facing a tricky situation – a) a marginal increase in global prices that will be
more than offset by duty costs, and b) a decline in domestic prices as supply increases.
Valuations and risks: We value Sesa on 3.5x 2013e EV/EBITDA (earlier 2012e), which
leads to our 12-month target price of INR330 (earlier INR310). See pg3 for details. Upside
risks: Higher-than-expected iron ore prices and volume growth. Downside risks: Lower-thanexpected
iron ore prices, lower volumes and unfavourable regulations and policies.
Valuations and risks
We value Sesa on 3.5x 2013e (earlier 2012e) EV/EBITDA, which leads to our 12-month target price of
INR330 (earlier INR310). Under our research model, for stocks with a volatility indicator, the Neutral
band is 10ppt above and below our hurdle rate for Indian stocks of 11%, or 1-21% around the current
share price (INR323 on 26 April 2011). Our target price implies potential return, including dividend
yield, of c3%, which is within the Neutral band; thus, we reiterate our Neutral (V) rating on the stock.
Risks: Lower (higher)-than-expected iron ore prices, lower (higher)-than-expected volume growth form
downside (upside) risks. Incremental regulatory problems on ore exports/royalty rates are risks.
Following the closure of the Thakurani mine at Orissa, Sesa’s target expansion to 50mt seems difficult.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa Ltd (SESA IN)
N(V): Better-than-expected results; nothing incrementally
exciting though
EBITDA at INR21bn driven by better grade rationalisation,
which is difficult to sustain over next few quarters
Nothing incrementally exciting; focus now seems to be on
value addition, where Sesa has yet to learn the ropes
Raise FY12/13 EBITDA by 4%/2% on revised iron ore price
forecasts; increase TP to INR330 (INR310); remain Neutral(V)
4Q performance and conference call highlights (see Exhibit 1 for details):
Volumes at 7.5mt were reported earlier this month, but a strong 20% q-o-q jump in
realisations surprised positively. Sesa’s iron ore realisation discount to our grade-adjusted
spot and contract-based index fell 400bp from 33% to c29%, owing to better grade
rationalisation. Revenues at INR36bn were thus up c50% y-o-y (HSBC: INR31.3bn).
EBITDA at INR21bn (+41% y-o-y, HSBC: INR18bn) was mainly top line driven, but the
export duty ‘pinch’ has begun to be felt – it was up 124% q-o-q at INR541/t.
NPAT at INR14.6bn (+20.3% y-o-y) was proportionally lower though, because of a higher
tax outgoing of INR7.7bn owing to lower provisions made in 1-3Q assuming that the
Karnataka ban will be lifted (Karnataka operations have an EOU status and lower tax rates).
Management has guided for 15-20% volume growth in FY12, but this assumes 3-4mt
of permits being granted in Karnataka.
Nothing incrementally exciting: Sesa added c32mt of reserves and resources (net) in FY11,
lower than 43mt in FY10. With the acquisition of Bellary Steel & Alloys, market buzz
(Economic Times article) on the Welspun plant acquisition and renewed focus on the
Jharkhand steel project, incremental focus seems to be on steel making, a business where Sesa
has yet to build expertise.
Raise FY12/13 estimates, based on revised HSBC commodity price forecasts: We raise
our FY12/13e EBITDA by 4%/2% based on revised iron ore prices (Metals & Mining
Chartbook 2Q11, 19 April). We mentioned in Budget 2012: iron ore taxes increased; negative
for ore exporters, 1 March, that given the increase in export duty on fines, Indian iron ore
producers are facing a tricky situation – a) a marginal increase in global prices that will be
more than offset by duty costs, and b) a decline in domestic prices as supply increases.
Valuations and risks: We value Sesa on 3.5x 2013e EV/EBITDA (earlier 2012e), which
leads to our 12-month target price of INR330 (earlier INR310). See pg3 for details. Upside
risks: Higher-than-expected iron ore prices and volume growth. Downside risks: Lower-thanexpected
iron ore prices, lower volumes and unfavourable regulations and policies.
Valuations and risks
We value Sesa on 3.5x 2013e (earlier 2012e) EV/EBITDA, which leads to our 12-month target price of
INR330 (earlier INR310). Under our research model, for stocks with a volatility indicator, the Neutral
band is 10ppt above and below our hurdle rate for Indian stocks of 11%, or 1-21% around the current
share price (INR323 on 26 April 2011). Our target price implies potential return, including dividend
yield, of c3%, which is within the Neutral band; thus, we reiterate our Neutral (V) rating on the stock.
Risks: Lower (higher)-than-expected iron ore prices, lower (higher)-than-expected volume growth form
downside (upside) risks. Incremental regulatory problems on ore exports/royalty rates are risks.
Following the closure of the Thakurani mine at Orissa, Sesa’s target expansion to 50mt seems difficult.
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