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Sesa Goa (SESA)
Metals & Mining
A weak quarter. Sesa’s reported 2QFY12 EBITDA of Rs2.6 bn declined 14.3% yoy and
missed our below-consensus estimate. Realization of US$84/tonne was lower than our
estimate even after accounting for shift in mix of ore towards Karnataka mine. Net
income of Rs12.8 mn was further impacted by forex loss of Rs2.3 bn. We model revised
iron ore price forecast in our estimates and lower our FY2012-14E earnings estimate by
5-9% and target price to Rs215. Regulatory uncertainty, implementation of mining tax
and correction in iron ore prices are additional headwinds. REDUCE.
A struggle to find positives
Sesa’s 2QFY12 EBITDA of Rs2.6 bn (-14.3% yoy) was 16.8% lower than our estimate on account
of lower-than-expected realizations at US$84/tonne versus our estimate of US$111/tonne.
Realization was weak even after accounting shift in mix of ore towards Karnataka mine. Note that
yoy EBITDA declined due to (1) export duty increase to 20% on fines as well lumps versus 5% on
fines and 15% on lumps in 2QFY11, and (2) decline in iron ore deliveries to 1.55 mn dmt from
1.82 mn tonnes in 2QFY11. Net income of Rs12.8 mn was impacted by Rs2.3 bn of forex losses
on FCCBs and overseas borrowings.
Iron ore shipment decline was a function of (1) lower volumes from Goa mines at 0.83 mn tonnes
versus 0.92 mn tones, and (2) termination of third-party mining agreement in Orissa. Shipments
from Karnataka increased 57.8% yoy to 0.71 mn tonnes.
FY2012E volume guidance maintained at 18 mn tonnes under certain conditions
Sesa maintained volume guidance for FY2012E provided Karnataka operations start by 4QFY12E.
Sesa believes there is reasonable progress on the EIA report to be submitted to the Supreme Court
by November 6 and is hopeful of starting mining in 4Q. Sesa also provided an update on the
progress of the Shah Commission probe into cases of illegal mining in Goa. Sesa has submitted
mining details for the past five years and indicated complete compliance on royalty payment and
quantum of ore extracted. However, there could be some industry-wide potential action/violation
on disposal of waste, encroachment of land and other minor issues which can potentially crop up.
Lower our iron ore price assumptions on fall in prices
We have adjusted our FY2012-14E iron ore price assumptions to US$150, US$130 and US$105/
tonne from US$157, US$140 and US$110/ tonne earlier. Slowdown in European markets and
potential concerns on the strength of demand from China drive the change. We lower our
FY2012-14E EPS to Rs36.5, Rs39.4 and Rs33 from Rs40.1, Rs41.6 and Rs34.5 earlier. We lower
our target price to Rs215 from Rs230 earlier. We value the core business at Rs118/ share. We
value the stake in Cairn India at Rs97/share after providing a 20% holding discount. REDUCE.
Key concerns remain
Sesa continues to face multiple headwinds in the form of (1) potential restriction on mining
iron ore in Goa due to several cases of illegal mining. While Sesa is compliant, any action
similar to the one in Karnataka will hurt, (2) risk to estimates on iron ore shipments, (3)
potential further increase in export duty. Export duty increased to 20% on fines as well
lumps in February 2011 versus 15% on lumps and 5% on fines earlier, and (4) imposition of
mining tax equivalent to royalty paid. Our FY2013E earnings and EBITDA will reduce by
8.7% and 9.2%, respectively on implementation of the new mining tax. Our fair value will
also reduce by Rs20/share.
Balance sheet—net debt increases to Rs33.1 bn
Sesa Goa’s long-term debt increasedto Rs43.7 bn while net debt increased to Rs33.1 bn.
The company took on board additional debt during the quarter in the form of packing credit.
Capital expenditure during the quarter amounted to Rs1.5 bn. The company has completed
all the formalities and paid the consideration of US$90 mn on acquisition of a 51% stake in
Western Cluster Limited (Liberia). Working capital levels remained high during the quarter as
is customary during this seasonally weak monsoon quarter. The company had cash and cash
equivalents amounting to Rs10.6 bn and net debt of Rs33.1 bn
Key highlights from 2QFY12 earnings call
Total iron ore deliveries for 2QFY12 stood at 1.55 mn dmt despite production at 1.12 mn
dmt during the quarter owing to liquidation of inventory. Karnataka accounted for
around 0.71 mn tonnes which were entirely sold domestically, while the balance was
exported.
Coke operations segment reported an EBIT loss of Rs43.1 mn during the quarter. It also
included forex loss of Rs250 mn from outstanding payment to coal suppliers.
Realization from e-auctions in Karnataka is 7-8% lower than September 2011 quarter
realization. Sesa has a total inventory pile-up of 0.8 mn tonnes at Karnataka out of which
around ~0.3 mtpa have been sold.
The company incurred royalty charges of around Rs325/tonne in 2QFY12 versus
Rs230/tonne in 1QFY12.
Pig iron production and sales for the quarter was 63 kt and 65 kt, respectively. Volumes
were affected during the quarter due to a combination of low availability of iron ore from
Karnataka and lower demand from foundries.
The 625 ktpa pig iron capacity expansion and associated doubling of metallurgical coke
capacity to 560 ktpa are on schedule to be completed during the current quarter.
Sesa had acquired a 51% stake in The Western Cluster Project for US$90 mn in 2QFY12
and has currently applied for an exploration license to carry out a feasibility study, having
received ratification from the Legislature of the Republic of Liberia.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa (SESA)
Metals & Mining
A weak quarter. Sesa’s reported 2QFY12 EBITDA of Rs2.6 bn declined 14.3% yoy and
missed our below-consensus estimate. Realization of US$84/tonne was lower than our
estimate even after accounting for shift in mix of ore towards Karnataka mine. Net
income of Rs12.8 mn was further impacted by forex loss of Rs2.3 bn. We model revised
iron ore price forecast in our estimates and lower our FY2012-14E earnings estimate by
5-9% and target price to Rs215. Regulatory uncertainty, implementation of mining tax
and correction in iron ore prices are additional headwinds. REDUCE.
A struggle to find positives
Sesa’s 2QFY12 EBITDA of Rs2.6 bn (-14.3% yoy) was 16.8% lower than our estimate on account
of lower-than-expected realizations at US$84/tonne versus our estimate of US$111/tonne.
Realization was weak even after accounting shift in mix of ore towards Karnataka mine. Note that
yoy EBITDA declined due to (1) export duty increase to 20% on fines as well lumps versus 5% on
fines and 15% on lumps in 2QFY11, and (2) decline in iron ore deliveries to 1.55 mn dmt from
1.82 mn tonnes in 2QFY11. Net income of Rs12.8 mn was impacted by Rs2.3 bn of forex losses
on FCCBs and overseas borrowings.
Iron ore shipment decline was a function of (1) lower volumes from Goa mines at 0.83 mn tonnes
versus 0.92 mn tones, and (2) termination of third-party mining agreement in Orissa. Shipments
from Karnataka increased 57.8% yoy to 0.71 mn tonnes.
FY2012E volume guidance maintained at 18 mn tonnes under certain conditions
Sesa maintained volume guidance for FY2012E provided Karnataka operations start by 4QFY12E.
Sesa believes there is reasonable progress on the EIA report to be submitted to the Supreme Court
by November 6 and is hopeful of starting mining in 4Q. Sesa also provided an update on the
progress of the Shah Commission probe into cases of illegal mining in Goa. Sesa has submitted
mining details for the past five years and indicated complete compliance on royalty payment and
quantum of ore extracted. However, there could be some industry-wide potential action/violation
on disposal of waste, encroachment of land and other minor issues which can potentially crop up.
Lower our iron ore price assumptions on fall in prices
We have adjusted our FY2012-14E iron ore price assumptions to US$150, US$130 and US$105/
tonne from US$157, US$140 and US$110/ tonne earlier. Slowdown in European markets and
potential concerns on the strength of demand from China drive the change. We lower our
FY2012-14E EPS to Rs36.5, Rs39.4 and Rs33 from Rs40.1, Rs41.6 and Rs34.5 earlier. We lower
our target price to Rs215 from Rs230 earlier. We value the core business at Rs118/ share. We
value the stake in Cairn India at Rs97/share after providing a 20% holding discount. REDUCE.
Key concerns remain
Sesa continues to face multiple headwinds in the form of (1) potential restriction on mining
iron ore in Goa due to several cases of illegal mining. While Sesa is compliant, any action
similar to the one in Karnataka will hurt, (2) risk to estimates on iron ore shipments, (3)
potential further increase in export duty. Export duty increased to 20% on fines as well
lumps in February 2011 versus 15% on lumps and 5% on fines earlier, and (4) imposition of
mining tax equivalent to royalty paid. Our FY2013E earnings and EBITDA will reduce by
8.7% and 9.2%, respectively on implementation of the new mining tax. Our fair value will
also reduce by Rs20/share.
Balance sheet—net debt increases to Rs33.1 bn
Sesa Goa’s long-term debt increasedto Rs43.7 bn while net debt increased to Rs33.1 bn.
The company took on board additional debt during the quarter in the form of packing credit.
Capital expenditure during the quarter amounted to Rs1.5 bn. The company has completed
all the formalities and paid the consideration of US$90 mn on acquisition of a 51% stake in
Western Cluster Limited (Liberia). Working capital levels remained high during the quarter as
is customary during this seasonally weak monsoon quarter. The company had cash and cash
equivalents amounting to Rs10.6 bn and net debt of Rs33.1 bn
Key highlights from 2QFY12 earnings call
Total iron ore deliveries for 2QFY12 stood at 1.55 mn dmt despite production at 1.12 mn
dmt during the quarter owing to liquidation of inventory. Karnataka accounted for
around 0.71 mn tonnes which were entirely sold domestically, while the balance was
exported.
Coke operations segment reported an EBIT loss of Rs43.1 mn during the quarter. It also
included forex loss of Rs250 mn from outstanding payment to coal suppliers.
Realization from e-auctions in Karnataka is 7-8% lower than September 2011 quarter
realization. Sesa has a total inventory pile-up of 0.8 mn tonnes at Karnataka out of which
around ~0.3 mtpa have been sold.
The company incurred royalty charges of around Rs325/tonne in 2QFY12 versus
Rs230/tonne in 1QFY12.
Pig iron production and sales for the quarter was 63 kt and 65 kt, respectively. Volumes
were affected during the quarter due to a combination of low availability of iron ore from
Karnataka and lower demand from foundries.
The 625 ktpa pig iron capacity expansion and associated doubling of metallurgical coke
capacity to 560 ktpa are on schedule to be completed during the current quarter.
Sesa had acquired a 51% stake in The Western Cluster Project for US$90 mn in 2QFY12
and has currently applied for an exploration license to carry out a feasibility study, having
received ratification from the Legislature of the Republic of Liberia.
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