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Sesa Goa reported cons. 2Q12 ebitda of Rs2.6bn (-14%yoy and -77%qoq) and 45% below our
estimates. Management informed that iron ore prices have fallen by 35% in the last few weeks
and expects to do volumes of 18-19mt in the current financial year. Valuations remain cheap due
to lack of catalysts. Maintain Buy.
Sesa Goa 2Q12 consolidated earnings analysis
Cons. net sales at Rs7.8bn (-63%qoq and -14%yoy) was 34% below our expectations. Cons.
ebitda at Rs2.6bn (-77%qoq and -14%yoy) was 45% below our expectations. Adj. net income
of Rs1.6bn (-81%qoq and -58%yoy) was 57% below our estimates. Earnings were impacted
by an adverse movement in foreign exchange rates by Rs2.3bn.
We note that during the second quarter of the financial year the operations in Goa are shut
due to heavy seasonal rains. Other income fell sharply by 63%yoy on account of cash outflow
due to the 18.5% acquisition of Cairn India. However, the corresponding income from
acquisition is yet to be accounted as the change in management at Vedanta Resources level
is yet to happen.
The iron ore segment PBIT at Rs2.37bn was up by 10%yoy. Iron ore sales volumes were
1.55mt during the quarter and up by 13%yoy after adjusting for Orissa volumes last year.
However, iron ore production during the quarter fell sharply to 1.12mt from 2.88mt last year
due to ban on mining iron ore imposed from August 26, 2011 and the discontinuation of the
Orissa operations.
PBIT from the metallurgical coke business fell sharply from a PBIT of Rs0.3bn to a PBIT loss
of Rs4m. The PBIT of the pig iron business PBIT also fell by 90%yoy to Rs3.5m. These
businesses were impacted due a surge in raw material costs and adverse movements in
foreign exchange rates.
Earnings call highlights
During the quarter Sesa Goa invested Rs4.11bn in Western Cluster Limited, Liberia and has
applied for exploration and mining licenses and expects to commence production in FY14.
Details of further requirement for investments would be made available after further studies
are conducted.
The Shah Committee is currently investigating into the iron ore mining activities in the State of
Goa and looking into several matters such as: i) whether the mining is done in excess of
environment limits? ii) reconciliation of royalties paid iii) dumping of iron ore wastes outside
the mining lease iv) forest and working plan issues v) surface rights. On the point of waste
dumps outside the mining leases, the Company informed that this has been a regular practise
in Goa since Portuguese times and that the Government is on the side of the industry on this
practise. Legally company does not find any issues in the mining activities and is legally
compliant. The Shah Commission would submit its report to the Parliament and the Mining
Ministry in the next few months. Due to the ongoing investigations the mining activities have
slowed down to an extent.
Management expects to do an output of 2mt from Karnataka in the last quarter of the financial
year once the mining activities are resumed and expects to do volumes of 18-19mt for the
whole year. However, given that so far in 1H the production has been 5.51mt, it would have to
achieve a run-rate of 6.5mt per quarter which we believe, could be challenging.
Management also informed that they have made representations to the Ministry of Steel over
their demands to increase the export duties on iron ore to 30% and have highlighted the
declining profitability of the mining industry.
Management also stated that over the last few weeks, prices of iron ore have fallen by 35%
for the lower grades and for the higher grades prices have fallen by 25%.
Our views and outlook
Valuations: Sesa Goa trades at a PE of 4X and an EV/Ebitda of 2.1X on our expected FY13
earnings. Our FY13 earnings assumptions factor volumes of 19.5mt and average realizations
of US$99/t. However, the outlook for future volumes and earnings have become uncertain in
the recent months due to i) the ban on mining in the Chitradurga, Karnataka mines by the
recent Supreme Court order ii) the recent correction in iron ore spot prices iii) investigation
into mining activities in Goa and iv) the new mining bill which calls for an increase in 100% in
the royalty rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa reported cons. 2Q12 ebitda of Rs2.6bn (-14%yoy and -77%qoq) and 45% below our
estimates. Management informed that iron ore prices have fallen by 35% in the last few weeks
and expects to do volumes of 18-19mt in the current financial year. Valuations remain cheap due
to lack of catalysts. Maintain Buy.
Sesa Goa 2Q12 consolidated earnings analysis
Cons. net sales at Rs7.8bn (-63%qoq and -14%yoy) was 34% below our expectations. Cons.
ebitda at Rs2.6bn (-77%qoq and -14%yoy) was 45% below our expectations. Adj. net income
of Rs1.6bn (-81%qoq and -58%yoy) was 57% below our estimates. Earnings were impacted
by an adverse movement in foreign exchange rates by Rs2.3bn.
We note that during the second quarter of the financial year the operations in Goa are shut
due to heavy seasonal rains. Other income fell sharply by 63%yoy on account of cash outflow
due to the 18.5% acquisition of Cairn India. However, the corresponding income from
acquisition is yet to be accounted as the change in management at Vedanta Resources level
is yet to happen.
The iron ore segment PBIT at Rs2.37bn was up by 10%yoy. Iron ore sales volumes were
1.55mt during the quarter and up by 13%yoy after adjusting for Orissa volumes last year.
However, iron ore production during the quarter fell sharply to 1.12mt from 2.88mt last year
due to ban on mining iron ore imposed from August 26, 2011 and the discontinuation of the
Orissa operations.
PBIT from the metallurgical coke business fell sharply from a PBIT of Rs0.3bn to a PBIT loss
of Rs4m. The PBIT of the pig iron business PBIT also fell by 90%yoy to Rs3.5m. These
businesses were impacted due a surge in raw material costs and adverse movements in
foreign exchange rates.
Earnings call highlights
During the quarter Sesa Goa invested Rs4.11bn in Western Cluster Limited, Liberia and has
applied for exploration and mining licenses and expects to commence production in FY14.
Details of further requirement for investments would be made available after further studies
are conducted.
The Shah Committee is currently investigating into the iron ore mining activities in the State of
Goa and looking into several matters such as: i) whether the mining is done in excess of
environment limits? ii) reconciliation of royalties paid iii) dumping of iron ore wastes outside
the mining lease iv) forest and working plan issues v) surface rights. On the point of waste
dumps outside the mining leases, the Company informed that this has been a regular practise
in Goa since Portuguese times and that the Government is on the side of the industry on this
practise. Legally company does not find any issues in the mining activities and is legally
compliant. The Shah Commission would submit its report to the Parliament and the Mining
Ministry in the next few months. Due to the ongoing investigations the mining activities have
slowed down to an extent.
Management expects to do an output of 2mt from Karnataka in the last quarter of the financial
year once the mining activities are resumed and expects to do volumes of 18-19mt for the
whole year. However, given that so far in 1H the production has been 5.51mt, it would have to
achieve a run-rate of 6.5mt per quarter which we believe, could be challenging.
Management also informed that they have made representations to the Ministry of Steel over
their demands to increase the export duties on iron ore to 30% and have highlighted the
declining profitability of the mining industry.
Management also stated that over the last few weeks, prices of iron ore have fallen by 35%
for the lower grades and for the higher grades prices have fallen by 25%.
Our views and outlook
Valuations: Sesa Goa trades at a PE of 4X and an EV/Ebitda of 2.1X on our expected FY13
earnings. Our FY13 earnings assumptions factor volumes of 19.5mt and average realizations
of US$99/t. However, the outlook for future volumes and earnings have become uncertain in
the recent months due to i) the ban on mining in the Chitradurga, Karnataka mines by the
recent Supreme Court order ii) the recent correction in iron ore spot prices iii) investigation
into mining activities in Goa and iv) the new mining bill which calls for an increase in 100% in
the royalty rates.
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