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UBS Investment Research
Sesa Goa
Compelling risk reward at current levels
„ Event: Underperformance despite strong stock specific fundamentals
Sesa Goa’s stock has corrected YTD c20% (underperformed Nifty by c6%) despite
strong fundamentals - a) strong spot iron ore prices (up 5% YTD). b) strong
Chinese iron ore imports – (up 8% YTD to 283mt) c) strong Chinese crude steel
production (up 10% YTD to 293mt). For Sesa, we forecast c22% volume growth in
FY12 (25/29mt of iron ore sales in FY12/13 vs 20.4mt in FY11).
„ Impact: Prices in near term risks; positive on iron ore in medium term
While we believe there could be near term pressures to iron ore prices due to 1)
high inventories in China (>90mt) 2) Seasonally easing of global steel production
rates, we remain positive on iron ore price in the medium term (price forecasts
between US$140-180/t in CY12-13). UBS recently upgraded China steel
production forecast for CY2011/2012 by 4% to 686/716mt (+9%/4% YoY)
implying an incremental Chinese iron ore demand of c40mt.
„ Action: Accumulate; Karnataka export resumption a near term trigger
According to Sesa Goa while it awaits transportation permits from the state
government for exports (export ban was lifted on Apr 20, 2011), it will continue to
sell c0.4mt iron ore domestically from Karnataka every quarter (c1.6mt vs 6mt
capacity). It expects to receive transport permits for exports in a month.
„ Valuation: maintain Buy rating and price target of 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 the Cairn India
stake at 20% discount to our price target of Rs425.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sesa Goa
Compelling risk reward at current levels
„ Event: Underperformance despite strong stock specific fundamentals
Sesa Goa’s stock has corrected YTD c20% (underperformed Nifty by c6%) despite
strong fundamentals - a) strong spot iron ore prices (up 5% YTD). b) strong
Chinese iron ore imports – (up 8% YTD to 283mt) c) strong Chinese crude steel
production (up 10% YTD to 293mt). For Sesa, we forecast c22% volume growth in
FY12 (25/29mt of iron ore sales in FY12/13 vs 20.4mt in FY11).
„ Impact: Prices in near term risks; positive on iron ore in medium term
While we believe there could be near term pressures to iron ore prices due to 1)
high inventories in China (>90mt) 2) Seasonally easing of global steel production
rates, we remain positive on iron ore price in the medium term (price forecasts
between US$140-180/t in CY12-13). UBS recently upgraded China steel
production forecast for CY2011/2012 by 4% to 686/716mt (+9%/4% YoY)
implying an incremental Chinese iron ore demand of c40mt.
„ Action: Accumulate; Karnataka export resumption a near term trigger
According to Sesa Goa while it awaits transportation permits from the state
government for exports (export ban was lifted on Apr 20, 2011), it will continue to
sell c0.4mt iron ore domestically from Karnataka every quarter (c1.6mt vs 6mt
capacity). It expects to receive transport permits for exports in a month.
„ Valuation: maintain Buy rating and price target of 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 the Cairn India
stake at 20% discount to our price target of Rs425.
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