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Sesa Goa Limited
1Q Results below expectation
1Q results disappoint; cutting estimates; Underperform
PAT declined 37%YoY to Rs8.4bn below consensus & our Rs11.5bn est. EBITDA
declined 26%YoY to Rs11.5bn below our est. due to lower volumes &
realizations. We cut our FY12-13e EPS by 9-10% & PO to Rs270 as we cut our
realization & other income forecast. We remain cautious on Sesa due to structural
volume & regulatory headwinds, low mine life & risk around proposed mining tax.
Volumes and realizations lower than expected
Vols. declined 13%YoY, 7% below our est. due to 19% decline in Goa vols. led by
transport restrictions. Iron ore EBITDA/t was US$52/t (4Q US$60/t) vs. our est. of
US$60/t. ASP declined 13%QoQ (US$89/wmt) despite flat spot iron ore prices
due to lower grade mix & higher mix of lower ASP domestic sales (Karnataka,
~28% of vols.). We est. avg. Goa ASP (excl. export tax) was ~US$112/t &
Karnataka ASP (ex mine) was US$31/t in 1Q. Domestic ASP has improved & is
near export parity (discount earlier) due to curtailed mining activity in Karnataka.
FY12 vol. growth guidance cut to 15-17% (20-25% before)
This is due to continued uncertainty around exports in Karnataka. Goa vols. are
capped at 15.5wmt (approved limit). It expects to sell ~6.5-7.5wmt from its
Karnataka mines (approval 6.6wmt) in FY12e. We see risks to guidance and
forecast volumes of 22.4wmt (10%YoY) in FY12 & 24.8wmt (11%Yoy) in FY13e.
Operating environment remains challenging
Karnataka Govt. is not yet issuing permits despite export ban being lifted. Mining
activity is suspended temporarily in the Bellary area (Karnataka) due to ongoing
survey related to illegal mining by Apex Court appointed team. Sesa’s mines are
located in Chitradurga area, but risk of the survey being extended to other mining
areas remains. In Goa, approvals are on hold and volumes are constrained by
transport restrictions. Proposed mine tax could hit Sesa’s EPS by ~9% if imposed.
Key takeaways from management call
Key result highlights
EBITDA declined 26%YoY: 1Q FY12 EBIDTA was Rs11.5bn, 21% below
our forecasts, due to lower volumes and lower realizations.
Volumes declined 13% YoY: Sesa delivered volumes of 4.8wmt (4.3dmt) in
1QFY12, 7% below our estimates. Hit to volumes due to Orissa mine closure
was well known, but Goa volumes disappointed (down 19%QoQ). This was
led by recent restrictions on iron ore road transport (curtailing road transport
timings to 12 hours/day vs. 24 hrs/day earlier). Karnataka volumes were
mainly sold in the domestic market due to export ban and accounted for 28%
of 1Q volumes (7% in 4QFY11).
Iron Ore EBITDA/ton was US$52/t in June Q: This was lower than our
US$60/t forecast due to higher mix of low margin domestic sales. Average
realizations decreased 13%QoQ to US$90/wmt (- US$103/wmt), 18% below
our estimates though average spot CFR prices were flat QoQ at US$183/t.
This was mainly due to lower grade sales and higher mix of domestic sales
which have lower margins.
Average cost/ton (incl. export tax) declined 9%QoQ to US$39/t: Though
full impact of export tax hike (export tax raised from 5% to 20% for fines
March onwards) came thru in the June Q, proportion of exports declined
during the quarter due to higher domestic sales. We note that the domestic
sales are on ex mine basis and hence costs are lower. Also export tax are
absent in case of domestic sales (ASP is lower as well).Tax rate was higher
at 31%: Tax rate was higher at 31% against our projection of 25% as the
Export Oriented Unit related tax benefit expired in March 2011.
Balance Sheet: Cash was Rs22.5n (US$0.5bn) vs. Rs106.8bn (US$2.3bn)
as on March Q. This was mainly due to completion of acquisition of 18.5%
stake in the oil asset. Sesa currently has a debt of Rs37bn (US$0.8bn)
excluding FCCB. Net debt was US$277mn (ex FCCB)
Guidance
Volume guidance cut to 15-17% (20-25% before): This is due to continued
uncertainty around exports in Karnataka despite removal of export ban. Goa
volumes are capped at 15.5wmt (14dmt) based on current environment
clearance. Sesa also expects to sell ~6-7dmt (6.6-7.7wmt) from its Karnataka
mines in FY12e (approval limit ~6dmt at present). We forecast volumes. of
22.4wmt (10.4%YoY) in FY12 and 24.8wmt in FY13e.
Other key updates
Karnataka export ban lifted but permits still not issued: Despite removal
of Karnataka export ban from April 20th onwards, the state government has
not issued any permits yet.
Disruptions to supply in Karnataka due to ongoing survey against
illegal mining: Iron ore mining activity at the Bellary Hospet region has been
suspended at several mines in Karnataka due to the ongoing survey of 99
mines (at the Bellary Hospet Region) by Supreme Court appointed Central
Empowered Committee (CEC). The Apex Court has appointed the
Committee to survey and demarcate leased mines in the key iron ore rich
Bellary district which accounts for over 75% of Karnataka’s iron ore
production (~40-45mtpa). Media reports suggest CEC has recommended
closure of ~27mines till now. CEC is expected to submit its report by August
2011. Karnataka Govt has indicated that it is awaiting completion of CEC
survey before allowing exports.
Karnataka supply disruption has improved domestic ASP: Sesa has
indicated that domestic realizations have improved due to disruption in local
supply owing to the temporary suspension of mining activity in Karnataka in
the Bellary District. Sesa indicated that domestic realizations are in line with
export parity (discount to export parity before). Hence profitability on
domestic sales is inline with exports at current prices. However volumes are
constrained as exports are not allowed. Sesa indicated that margins at
Karnataka mines are close to US$20/t at current prices.
Mining activity could resume after survey is completed: We think the
current tightness in the Karnataka iron ore markets may improve as mining
activity (excluding suspended illegal mines) are likely to resume production
after the survey is completed. Also several mines in Karnataka had closed
due to the export ban which could restart due to higher domestic realizations.
Changes to our estimates
We have cut our FY12-13e EPS by 9-10% due to lower realizations and
other income forecast. We have cut our FY12e-13e EBITDA by 3-5% as we
factor in lower realizations & margins due to higher domestic sales (as permit
issuance are delayed).
We have lowered our realization forecast in FY12e by 9% as we build higher
domestic sales volumes (due to delays in export permit issuance) and lower
realization on domestic sales. We currently assume exports will resume in
2HFY12 post completion of the ongoing survey.
We have also lowered our interest income forecast due to completion of
18.5% stake buy in the oil asset. We account for the investment as financial
investment on the Balance Sheet.
Price objective basis & risk
Sesa Goa Limited (XSGAF)
Price objective of Rs270 is set at 0.9x our NPV estimate. We believe Sesa could
trade at a discount to our NPV estimate as we see potential risks to our NPV
analysis due to lower medium term volume outlook and overhang related to
volume headwinds, regulatory uncertainties and uncertainty around proposed oil
asset acquisition. At our PO Sesa would trade at 6.6x FY12e EPS.
Our NPV estimate assumes a WACC of 12.5% and a terminal growth of 0%.
We forecast iron ore spot CFR prices of US$173/t in FY12 , US$168/t in FY13e
and US$158/t in FY14e. We forecast volumes of 22.4mn tons in FY12, 24.8mn
tons in FY13e. Our forecasts assume further reserve upgrade and assume
reserves of 333mn tons vs. 306mn tons of reserves as on March 11.
Downside risks to our valuation are lower iron ore prices due to lower-than-expected
global steel output and ramp-up in Chinese mines output. Lower-than-expected
volume growth and adverse regulatory policy changes including mining tax.
Upside risks are stronger iron ore prices, stronger volume growth, better visibility on
volumes led by additional mine approvals, export tax reversal and reserve accretion
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa Limited
1Q Results below expectation
1Q results disappoint; cutting estimates; Underperform
PAT declined 37%YoY to Rs8.4bn below consensus & our Rs11.5bn est. EBITDA
declined 26%YoY to Rs11.5bn below our est. due to lower volumes &
realizations. We cut our FY12-13e EPS by 9-10% & PO to Rs270 as we cut our
realization & other income forecast. We remain cautious on Sesa due to structural
volume & regulatory headwinds, low mine life & risk around proposed mining tax.
Volumes and realizations lower than expected
Vols. declined 13%YoY, 7% below our est. due to 19% decline in Goa vols. led by
transport restrictions. Iron ore EBITDA/t was US$52/t (4Q US$60/t) vs. our est. of
US$60/t. ASP declined 13%QoQ (US$89/wmt) despite flat spot iron ore prices
due to lower grade mix & higher mix of lower ASP domestic sales (Karnataka,
~28% of vols.). We est. avg. Goa ASP (excl. export tax) was ~US$112/t &
Karnataka ASP (ex mine) was US$31/t in 1Q. Domestic ASP has improved & is
near export parity (discount earlier) due to curtailed mining activity in Karnataka.
FY12 vol. growth guidance cut to 15-17% (20-25% before)
This is due to continued uncertainty around exports in Karnataka. Goa vols. are
capped at 15.5wmt (approved limit). It expects to sell ~6.5-7.5wmt from its
Karnataka mines (approval 6.6wmt) in FY12e. We see risks to guidance and
forecast volumes of 22.4wmt (10%YoY) in FY12 & 24.8wmt (11%Yoy) in FY13e.
Operating environment remains challenging
Karnataka Govt. is not yet issuing permits despite export ban being lifted. Mining
activity is suspended temporarily in the Bellary area (Karnataka) due to ongoing
survey related to illegal mining by Apex Court appointed team. Sesa’s mines are
located in Chitradurga area, but risk of the survey being extended to other mining
areas remains. In Goa, approvals are on hold and volumes are constrained by
transport restrictions. Proposed mine tax could hit Sesa’s EPS by ~9% if imposed.
Key takeaways from management call
Key result highlights
EBITDA declined 26%YoY: 1Q FY12 EBIDTA was Rs11.5bn, 21% below
our forecasts, due to lower volumes and lower realizations.
Volumes declined 13% YoY: Sesa delivered volumes of 4.8wmt (4.3dmt) in
1QFY12, 7% below our estimates. Hit to volumes due to Orissa mine closure
was well known, but Goa volumes disappointed (down 19%QoQ). This was
led by recent restrictions on iron ore road transport (curtailing road transport
timings to 12 hours/day vs. 24 hrs/day earlier). Karnataka volumes were
mainly sold in the domestic market due to export ban and accounted for 28%
of 1Q volumes (7% in 4QFY11).
Iron Ore EBITDA/ton was US$52/t in June Q: This was lower than our
US$60/t forecast due to higher mix of low margin domestic sales. Average
realizations decreased 13%QoQ to US$90/wmt (- US$103/wmt), 18% below
our estimates though average spot CFR prices were flat QoQ at US$183/t.
This was mainly due to lower grade sales and higher mix of domestic sales
which have lower margins.
Average cost/ton (incl. export tax) declined 9%QoQ to US$39/t: Though
full impact of export tax hike (export tax raised from 5% to 20% for fines
March onwards) came thru in the June Q, proportion of exports declined
during the quarter due to higher domestic sales. We note that the domestic
sales are on ex mine basis and hence costs are lower. Also export tax are
absent in case of domestic sales (ASP is lower as well).Tax rate was higher
at 31%: Tax rate was higher at 31% against our projection of 25% as the
Export Oriented Unit related tax benefit expired in March 2011.
Balance Sheet: Cash was Rs22.5n (US$0.5bn) vs. Rs106.8bn (US$2.3bn)
as on March Q. This was mainly due to completion of acquisition of 18.5%
stake in the oil asset. Sesa currently has a debt of Rs37bn (US$0.8bn)
excluding FCCB. Net debt was US$277mn (ex FCCB)
Guidance
Volume guidance cut to 15-17% (20-25% before): This is due to continued
uncertainty around exports in Karnataka despite removal of export ban. Goa
volumes are capped at 15.5wmt (14dmt) based on current environment
clearance. Sesa also expects to sell ~6-7dmt (6.6-7.7wmt) from its Karnataka
mines in FY12e (approval limit ~6dmt at present). We forecast volumes. of
22.4wmt (10.4%YoY) in FY12 and 24.8wmt in FY13e.
Other key updates
Karnataka export ban lifted but permits still not issued: Despite removal
of Karnataka export ban from April 20th onwards, the state government has
not issued any permits yet.
Disruptions to supply in Karnataka due to ongoing survey against
illegal mining: Iron ore mining activity at the Bellary Hospet region has been
suspended at several mines in Karnataka due to the ongoing survey of 99
mines (at the Bellary Hospet Region) by Supreme Court appointed Central
Empowered Committee (CEC). The Apex Court has appointed the
Committee to survey and demarcate leased mines in the key iron ore rich
Bellary district which accounts for over 75% of Karnataka’s iron ore
production (~40-45mtpa). Media reports suggest CEC has recommended
closure of ~27mines till now. CEC is expected to submit its report by August
2011. Karnataka Govt has indicated that it is awaiting completion of CEC
survey before allowing exports.
Karnataka supply disruption has improved domestic ASP: Sesa has
indicated that domestic realizations have improved due to disruption in local
supply owing to the temporary suspension of mining activity in Karnataka in
the Bellary District. Sesa indicated that domestic realizations are in line with
export parity (discount to export parity before). Hence profitability on
domestic sales is inline with exports at current prices. However volumes are
constrained as exports are not allowed. Sesa indicated that margins at
Karnataka mines are close to US$20/t at current prices.
Mining activity could resume after survey is completed: We think the
current tightness in the Karnataka iron ore markets may improve as mining
activity (excluding suspended illegal mines) are likely to resume production
after the survey is completed. Also several mines in Karnataka had closed
due to the export ban which could restart due to higher domestic realizations.
Changes to our estimates
We have cut our FY12-13e EPS by 9-10% due to lower realizations and
other income forecast. We have cut our FY12e-13e EBITDA by 3-5% as we
factor in lower realizations & margins due to higher domestic sales (as permit
issuance are delayed).
We have lowered our realization forecast in FY12e by 9% as we build higher
domestic sales volumes (due to delays in export permit issuance) and lower
realization on domestic sales. We currently assume exports will resume in
2HFY12 post completion of the ongoing survey.
We have also lowered our interest income forecast due to completion of
18.5% stake buy in the oil asset. We account for the investment as financial
investment on the Balance Sheet.
Price objective basis & risk
Sesa Goa Limited (XSGAF)
Price objective of Rs270 is set at 0.9x our NPV estimate. We believe Sesa could
trade at a discount to our NPV estimate as we see potential risks to our NPV
analysis due to lower medium term volume outlook and overhang related to
volume headwinds, regulatory uncertainties and uncertainty around proposed oil
asset acquisition. At our PO Sesa would trade at 6.6x FY12e EPS.
Our NPV estimate assumes a WACC of 12.5% and a terminal growth of 0%.
We forecast iron ore spot CFR prices of US$173/t in FY12 , US$168/t in FY13e
and US$158/t in FY14e. We forecast volumes of 22.4mn tons in FY12, 24.8mn
tons in FY13e. Our forecasts assume further reserve upgrade and assume
reserves of 333mn tons vs. 306mn tons of reserves as on March 11.
Downside risks to our valuation are lower iron ore prices due to lower-than-expected
global steel output and ramp-up in Chinese mines output. Lower-than-expected
volume growth and adverse regulatory policy changes including mining tax.
Upside risks are stronger iron ore prices, stronger volume growth, better visibility on
volumes led by additional mine approvals, export tax reversal and reserve accretion
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