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Weak volumes and ASPs hit 2Q
Sesa’s 2Q recurring profits declined 32% YoY and missed estimates by 25%
mainly due to lower-than-expected volumes and ASPs. With Karnataka
volumes still under pressure due to the mining ban and global iron ore prices
having come off sharply, near-term earnings will come under further
pressure. We cut FY12-14 EPS by 25-48% and maintain U-PF on Sesa with a
revised target price of Rs190.
2Q results miss estimates due to lower topline
Sesa’s 2Q net sales declined 14% YoY and came in 16% below estimates. Iron ore
volumes fell 15% YoY (6% below est) due to the end of the Orissa third-party
contract, logistical issues in Goa and the mining ban in Karnataka. Iron ore ASPs
fell 16% QoQ despite stable global prices as the share of Karnataka volumes (sold
at lower ASPs in the domestic market) rose QoQ. Costs were relatively under
control but the lower topline resulted in 2Q EBITDA declining 14% YoY (23%
below est). A QoQ fall in other income and rise in interest costs (due to cash
outflow and rise in debt on account of the Cairn stake purchase) also impacted 2Q
results. Recurring net profit declined 32% YoY (25% below est). 2Q results
included Rs2.3bn of forex loss on Sesa’s foreign currency loans and reported net
profit was much lower at just Rs13m – down almost 100% YoY.
Volume pressures are now being accompanied by price weakness
Sesa’s Goa volumes have been under pressure for some time thanks to logistical
issues and there is some risk of the situation there worsening post submission of
the Shah Commission report. Karnataka volumes are still subdued due to the
mining ban though Sesa is selling some ore in the ongoing e-auctions. Even if the
Supreme Court partially lifts the mining ban by end-FY12 (we believe it might
take longer), the export ban is not likely to get lifted so soon. The recent sharp
decline in iron ore price will add to Sesa’s woes in coming quarters as well.
We cut estimates 25-48% over FY12-14 and maintain U-PF
The sharp EPS cut factors in 1) 20-23% lower volumes; 2) Higher discount to
global prices due to lower grades and higher domestic sales; 3) Removal of
accretion of Cairn India profits from FY12 since we now assume Sesa’s stake in
Cairn rising to 20% only by end-FY12, and 4) Lower Cairn India profits over FY13-
14 post recent cuts by CLSA’s Oil & Gas team. Our revised DCF-based target price
for Sesa is Rs190, which factors in 1) Volumes rising at ~10% Cagr to a peak of
30mt in FY17 (40mt previously); 2) Accretion of 90mt to reserves from existing
mines (160mt previously). We have not assigned any value to Sesa’s recent
Liberian acquisition since we believe that it is too early to assign any value to this
project. We see continued risk to earnings and see a lack of positive catalysts for
the stock and maintain U-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Weak volumes and ASPs hit 2Q
Sesa’s 2Q recurring profits declined 32% YoY and missed estimates by 25%
mainly due to lower-than-expected volumes and ASPs. With Karnataka
volumes still under pressure due to the mining ban and global iron ore prices
having come off sharply, near-term earnings will come under further
pressure. We cut FY12-14 EPS by 25-48% and maintain U-PF on Sesa with a
revised target price of Rs190.
2Q results miss estimates due to lower topline
Sesa’s 2Q net sales declined 14% YoY and came in 16% below estimates. Iron ore
volumes fell 15% YoY (6% below est) due to the end of the Orissa third-party
contract, logistical issues in Goa and the mining ban in Karnataka. Iron ore ASPs
fell 16% QoQ despite stable global prices as the share of Karnataka volumes (sold
at lower ASPs in the domestic market) rose QoQ. Costs were relatively under
control but the lower topline resulted in 2Q EBITDA declining 14% YoY (23%
below est). A QoQ fall in other income and rise in interest costs (due to cash
outflow and rise in debt on account of the Cairn stake purchase) also impacted 2Q
results. Recurring net profit declined 32% YoY (25% below est). 2Q results
included Rs2.3bn of forex loss on Sesa’s foreign currency loans and reported net
profit was much lower at just Rs13m – down almost 100% YoY.
Volume pressures are now being accompanied by price weakness
Sesa’s Goa volumes have been under pressure for some time thanks to logistical
issues and there is some risk of the situation there worsening post submission of
the Shah Commission report. Karnataka volumes are still subdued due to the
mining ban though Sesa is selling some ore in the ongoing e-auctions. Even if the
Supreme Court partially lifts the mining ban by end-FY12 (we believe it might
take longer), the export ban is not likely to get lifted so soon. The recent sharp
decline in iron ore price will add to Sesa’s woes in coming quarters as well.
We cut estimates 25-48% over FY12-14 and maintain U-PF
The sharp EPS cut factors in 1) 20-23% lower volumes; 2) Higher discount to
global prices due to lower grades and higher domestic sales; 3) Removal of
accretion of Cairn India profits from FY12 since we now assume Sesa’s stake in
Cairn rising to 20% only by end-FY12, and 4) Lower Cairn India profits over FY13-
14 post recent cuts by CLSA’s Oil & Gas team. Our revised DCF-based target price
for Sesa is Rs190, which factors in 1) Volumes rising at ~10% Cagr to a peak of
30mt in FY17 (40mt previously); 2) Accretion of 90mt to reserves from existing
mines (160mt previously). We have not assigned any value to Sesa’s recent
Liberian acquisition since we believe that it is too early to assign any value to this
project. We see continued risk to earnings and see a lack of positive catalysts for
the stock and maintain U-PF.
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