Buy Sesa Goa - Waiting for summer ::RBS

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Sesa Goa
Waiting for summer
Sesa Goa has maintained its guidance of achieving 40mt of output by FY13. We
have factored DMT volumes of 19.4mt and 20.9mt for FY12/13. The new MMDR act
could impact our valuation by Rs20/share but could also lead to approvals to
mine more ore. We think Sesa Goa's valuation remains cheap. Buy maintained.


FY11 annual report highlights: maintaining targets and diversifying
Management has maintained its target of increasing iron ore production from Goa and
Karnataka to 40mt (on a WMT basis) with logistics, mining and processing capacity addition
progressing well, but statutory clearances pending. During FY11, the company added 53mnt
of iron ore to gross reserves and resources. Pig iron and met coke capacity expansion are on
track, according to management, and set to increase to 625KT and 560KT respectively over
the next year.
Volumes constrained by local laws
The resumption of exports from Karnataka is still being hampered by a lack of clear policies
for evacuation. Restrictions on movements of trucks in Goa are also limiting the smooth
evacuation of iron ore to ports from the mines. Passage of the Goa mining policy is pending
which should pave the way for capacity increase to 40mt. We remain cautious on volume
growth and model sales volumes of 19.4mt and 20.9mt for FY12/13F (on a DMT basis)
versus 18.1mt in FY11.
Adjusting target price: Buy maintained with a Rs360 target price
Sesa Goa acquired 18.5% of Cairn India at an average price of Rs341.5/share with another
1.5% stake to be purchased from Vedanta Resources once the deal has government
approval. If the draft Mines and Minerals Development and Regulation (MMDR) Bill were
approved in its current 100% royalty-sharing form, our FY12F earnings would fall 6% and our
target price Rs20 to Rs340. However, awaiting further clarity, we do not factor this into our
valuation yet. The MMDR Act could pave the way for the local Goa government to pass its
mining policy which could result in approvals to raise output. We roll-forward to a FY13F
EV/EBITDA target of 5.0x (peer average). We also update our Cairn India valuation. Buy
maintained, with a new TP of Rs360 (down from Rs380).