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UBS Investment Research
Sesa Goa
Q 1 Results – ASP disappoints
Event: Q1 EBITDA higher than UBS/e, PAT was inline
Sesa Goa’s Q1FY12 EBITDA came in at Rs11.3b (-46%QoQ, -26%YoY) vs
UBS/e /consensus of Rs10.4b/Rs12.4b. PAT at Rs8.4b (-42%QoQ, -35%YoY) was
in line with UBS/e of Rs8.45b and lower than consensus of Rs10.3b. Revenue at
Rs20.9bn (-42%QoQ,-13%YoY) was lower than both UBS/e /consensus of
Rs23.8bn/Rs24.5bn due to 1) lower realizations:US$89/wmt vs UBS/e of
US$101/wmt, 2) lower volumes of 4.8mt (wmt) vs UBS/e of 5mt. EBITDA was
higher than UBS/e due to lower than expected raw material and freight costs.
Impact: Issues not structural, coming quarters expected to be better
ASP declined 14% QoQ to US$89/wmt (-4%YoY) despite stable global iron ore
prices primarily due to the sales mix that was skewed towards lower grade ore (no
production issues). Management expects this to be compensated in the coming qtrs.
Volume guidance for FY12 is lowered to c24.4mt (wmt) (UBSe 24.9mt).
Action: Reiterate Buy, most downsides priced in
Sales from Karnataka would be c6-7mt due to a strong domestic market with prices
higher than export parity. Karnataka export resumption is a near term trigger.
Adjusting for lost production from Orissa, the sales volume is flat on a YoY basis.
With strong iron ore price outlook and expansion plans, we see limited downside at
current levels. Our worst case price target assuming doubling of royalty is Rs327.
Valuation: Maintain Buy and a PT of Rs400
We continue to value Sesa on a sum-of-the-parts basis, with its businesses valued
at 4.5x EV/EBITDA (FY13E) and Cairn India at 20% discount to our price target.
Key Conference Call Takeaways
(1) Management has lowered guidance for volume growth to 15-20% for FY12
due to delay in exports from Karnataka. The volume number could be
c23.3-24.4 mt. Exports have not yet been resumed despite Supreme Court
order as the state government is still in the process of setting up checks and
balances to curtail illegal mining (only post which transport permits will be
issued to exporters).
(2) Iron ore realization was lower at US$89/t (-14% QoQ, -4% YoY) due to a)
sales mix that was skewed towards lower grade and b) marginally lower
realizations in the domestic market during the first 2 months of the quarter.
Management claims that it was a strategic decision to push higher than
normal proportion of lower grade ore this quarter, and said there is no ore
grade deterioration at the mine production level.
(3) The current spot domestic iron ore prices are slightly higher than the export
parity price (export price adjusted for export duty and other applicable
tariffs) which is positive fro Sesa given delay in exports.
(4) Volumes were down as the production from the third party mining lease in
Orissa has lapsed. The increase in 0.5 mt volume from Karnataka has been
offset by a similar volume loss from Goa due to logistic and environmental
issues. The management expects to sell 6-7 mt iron ore from Karnataka in
the domestic market. However, if exports resume the volumes from
Karnataka could reach 8 mt (subject to environmental clearances for the
additional 2 mt, the company currently has approvals for mining 6mtpa in
Karnataka).
(5) Additionally, the management’s plan to increase capacity at Karnataka to
10 mtpa has all state government clearances and is only pending due to
clearance from the environmental ministry. Management expects to exit
FY12 with 10 mtpa capacity in Karnataka.
(6) Management believes that the global iron ore prices would remain strong
for at least 2-3 years.
(7) The Supreme Court ordered CEC survey (related to mine boundaries) is
only applicable to Bellary-Hospet region in Karnataka where Sesa operates
no mines. Management doesn’t expect the issue to spill over to Sesa’s
mines and Sesa has made sure the boundaries of mines are right.
(8) Capacity expansion in Goa is on hold for now as the statutory clearances
are not in place yet. The expansion proposals are pending since 1-2 years
now and the management is not sure when exactly things will be resolved.
(9) The pig iron production was lower due to non-availability of high grade
iron ore lump ore (due to mine closures in Bellary-Hospet belt). However,
once the sinter plant is commissioned at the pig iron facility, iron ore fines
from Karnataka could be used to replace high grade lump ore.
(10) The effective tax rate for the quarter has come in higher at 31% as the
export oriented unit scheme has come to an end in the last quarter.
(11) The total iron ore inventory stands at 3.5 mt as of Jun 30, 2011.
(12) As of Jun 30, 2011 - total debt on books was cRs37bn, which the
management expects to repay by FY12 ending. Cash & equivalents balance
was Rs15bn, out which cRs11bn will be used for acquiring 1.5% stake in
Cairn India to complete the committed 20% stake (acquired 18.5% stake
till now). FY12 capex would be cUS$300m (US$200m exp + US$100m
sustaining).
Sesa Goa
Sesa Goa is a 51%-owned subsidiary of the Vedanta Group and was acquired
from Mitsui & Co., in 2007. Sesa is the largest listed Indian exporter of iron ore,
selling 12.3m tonnes in FY08 primarily to steel-making companies in China,
Japan and Europe. Over the past decade, Sesa has diversified into the
manufacture of pig iron and metallurgical coke via its 88.2%-owned subsidiary,
Sesa Industries Ltd.
Statement of Risk
Sesa, like all mining companies, is subject to exchange rate risk, and to price
fluctuations of its main products. Investors should be aware mining stocks
including Sesa are inherently volatile and extremely dependent on global
underlying demand and supplier behaviour. A weakening in global production
could place our pricing forecast, earnings and valuations under pressure.
Investment in Sesa is subject to China risk, given the majority of forecasted iron
ore growth is from China.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sesa Goa
Q 1 Results – ASP disappoints
Event: Q1 EBITDA higher than UBS/e, PAT was inline
Sesa Goa’s Q1FY12 EBITDA came in at Rs11.3b (-46%QoQ, -26%YoY) vs
UBS/e /consensus of Rs10.4b/Rs12.4b. PAT at Rs8.4b (-42%QoQ, -35%YoY) was
in line with UBS/e of Rs8.45b and lower than consensus of Rs10.3b. Revenue at
Rs20.9bn (-42%QoQ,-13%YoY) was lower than both UBS/e /consensus of
Rs23.8bn/Rs24.5bn due to 1) lower realizations:US$89/wmt vs UBS/e of
US$101/wmt, 2) lower volumes of 4.8mt (wmt) vs UBS/e of 5mt. EBITDA was
higher than UBS/e due to lower than expected raw material and freight costs.
Impact: Issues not structural, coming quarters expected to be better
ASP declined 14% QoQ to US$89/wmt (-4%YoY) despite stable global iron ore
prices primarily due to the sales mix that was skewed towards lower grade ore (no
production issues). Management expects this to be compensated in the coming qtrs.
Volume guidance for FY12 is lowered to c24.4mt (wmt) (UBSe 24.9mt).
Action: Reiterate Buy, most downsides priced in
Sales from Karnataka would be c6-7mt due to a strong domestic market with prices
higher than export parity. Karnataka export resumption is a near term trigger.
Adjusting for lost production from Orissa, the sales volume is flat on a YoY basis.
With strong iron ore price outlook and expansion plans, we see limited downside at
current levels. Our worst case price target assuming doubling of royalty is Rs327.
Valuation: Maintain Buy and a PT of Rs400
We continue to value Sesa on a sum-of-the-parts basis, with its businesses valued
at 4.5x EV/EBITDA (FY13E) and Cairn India at 20% discount to our price target.
Key Conference Call Takeaways
(1) Management has lowered guidance for volume growth to 15-20% for FY12
due to delay in exports from Karnataka. The volume number could be
c23.3-24.4 mt. Exports have not yet been resumed despite Supreme Court
order as the state government is still in the process of setting up checks and
balances to curtail illegal mining (only post which transport permits will be
issued to exporters).
(2) Iron ore realization was lower at US$89/t (-14% QoQ, -4% YoY) due to a)
sales mix that was skewed towards lower grade and b) marginally lower
realizations in the domestic market during the first 2 months of the quarter.
Management claims that it was a strategic decision to push higher than
normal proportion of lower grade ore this quarter, and said there is no ore
grade deterioration at the mine production level.
(3) The current spot domestic iron ore prices are slightly higher than the export
parity price (export price adjusted for export duty and other applicable
tariffs) which is positive fro Sesa given delay in exports.
(4) Volumes were down as the production from the third party mining lease in
Orissa has lapsed. The increase in 0.5 mt volume from Karnataka has been
offset by a similar volume loss from Goa due to logistic and environmental
issues. The management expects to sell 6-7 mt iron ore from Karnataka in
the domestic market. However, if exports resume the volumes from
Karnataka could reach 8 mt (subject to environmental clearances for the
additional 2 mt, the company currently has approvals for mining 6mtpa in
Karnataka).
(5) Additionally, the management’s plan to increase capacity at Karnataka to
10 mtpa has all state government clearances and is only pending due to
clearance from the environmental ministry. Management expects to exit
FY12 with 10 mtpa capacity in Karnataka.
(6) Management believes that the global iron ore prices would remain strong
for at least 2-3 years.
(7) The Supreme Court ordered CEC survey (related to mine boundaries) is
only applicable to Bellary-Hospet region in Karnataka where Sesa operates
no mines. Management doesn’t expect the issue to spill over to Sesa’s
mines and Sesa has made sure the boundaries of mines are right.
(8) Capacity expansion in Goa is on hold for now as the statutory clearances
are not in place yet. The expansion proposals are pending since 1-2 years
now and the management is not sure when exactly things will be resolved.
(9) The pig iron production was lower due to non-availability of high grade
iron ore lump ore (due to mine closures in Bellary-Hospet belt). However,
once the sinter plant is commissioned at the pig iron facility, iron ore fines
from Karnataka could be used to replace high grade lump ore.
(10) The effective tax rate for the quarter has come in higher at 31% as the
export oriented unit scheme has come to an end in the last quarter.
(11) The total iron ore inventory stands at 3.5 mt as of Jun 30, 2011.
(12) As of Jun 30, 2011 - total debt on books was cRs37bn, which the
management expects to repay by FY12 ending. Cash & equivalents balance
was Rs15bn, out which cRs11bn will be used for acquiring 1.5% stake in
Cairn India to complete the committed 20% stake (acquired 18.5% stake
till now). FY12 capex would be cUS$300m (US$200m exp + US$100m
sustaining).
Sesa Goa
Sesa Goa is a 51%-owned subsidiary of the Vedanta Group and was acquired
from Mitsui & Co., in 2007. Sesa is the largest listed Indian exporter of iron ore,
selling 12.3m tonnes in FY08 primarily to steel-making companies in China,
Japan and Europe. Over the past decade, Sesa has diversified into the
manufacture of pig iron and metallurgical coke via its 88.2%-owned subsidiary,
Sesa Industries Ltd.
Statement of Risk
Sesa, like all mining companies, is subject to exchange rate risk, and to price
fluctuations of its main products. Investors should be aware mining stocks
including Sesa are inherently volatile and extremely dependent on global
underlying demand and supplier behaviour. A weakening in global production
could place our pricing forecast, earnings and valuations under pressure.
Investment in Sesa is subject to China risk, given the majority of forecasted iron
ore growth is from China.
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