Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SESA GOA (3-UNDERWEIGHT; PT RS200; +4%): STRONG HEADWINDS PERSIST
The regulatory environment continues to be unfavourable for Sesa Goa’s iron ore
mining operations. Earnings visibility for Sesa Goa over the next two years is quite low,
due to uncertainty over volumes in Karnataka, the ongoing government investigation of
the Goa mining sector, proposals included in the draft mining bill and a possible further
hike in export duties. Furthermore, with more than half of the balance sheet locked in
investments in Cairn India, Western Cluster (WCL) and Vedanta Aluminium ICD’s ROE is
likely to dip sharply going forward. We initiate coverage on Sesa Goa with a
3-Underweight rating and a Rs200 PT, representing 4% potential upside).
Karnataka mining impasse continues; Goa could be a spoil sport: Sesa Goa’s Karnataka
operations continue to be impacted by the mining ban. Although management claims that
the Karnataka mine has been examined and cleared by concerned authorities, we expect
operations to restart only in 1Q FY13. The ongoing Shah Commission investigation, logistics
issues and the fact that the erstwhile Dempo mines need to become compliant as per new
regulations are key risks to volumes in Goa. New approvals in Goa are anyways on hold. We
estimate 17.3mn and 18.6mn tonnes of volumes in FY12 and FY13, respectively.
Other regulatory proposals to remain an overhang: The draft mining bill, recently
approved by the Cabinet recommends a mining tax equal to the royalty for non coal
companies, although the bill has not yet been approved by the parliament. If imposed, we
estimate the potential hit to EPS to be around 12%. The steel ministry is demanding an
export tax hike to 30% (20% currently). A further hike in export duty is a scenario we would
not rule out.
Capex commitment in WCL uncertain: Sesa Goa’s recent proposal to buy a 51% stake in
Western Cluster Ltd from Elenito Minerals was ratified by the local government. Although
the acquisition offers the much needed longer-term visibility for Sesa Goa to sustain
volumes, it will take substantial time and investment before it hits it initial production target
of 8mn tonnes. Although unconfirmed by the company, press reports (Source: The Hindu
Business Line, 29th July 2011) suggest that Sesa Goa will have to investment US$600mn
over the next three years. We have not built in any incremental investment in WCL by Sesa
in our forecasts.
ROE to drop sharply; 3-Underweight: We highlight that as of 1H FY12, more than one-half
of Sesa Goa’s balance sheet was locked in: 1) US$2.7bn investment in Cairn India for an
18.5% stake; 2) US$200mn in inter-corporate deposit to group Company, Vedanta
Aluminium Ltd; and 3) US$90mn investment in Western Cluster Ltd in Liberia. Even as we
expect core ROE to remain strong at 33%, we expect overall ROE to decline to 15% in
FY13E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SESA GOA (3-UNDERWEIGHT; PT RS200; +4%): STRONG HEADWINDS PERSIST
The regulatory environment continues to be unfavourable for Sesa Goa’s iron ore
mining operations. Earnings visibility for Sesa Goa over the next two years is quite low,
due to uncertainty over volumes in Karnataka, the ongoing government investigation of
the Goa mining sector, proposals included in the draft mining bill and a possible further
hike in export duties. Furthermore, with more than half of the balance sheet locked in
investments in Cairn India, Western Cluster (WCL) and Vedanta Aluminium ICD’s ROE is
likely to dip sharply going forward. We initiate coverage on Sesa Goa with a
3-Underweight rating and a Rs200 PT, representing 4% potential upside).
Karnataka mining impasse continues; Goa could be a spoil sport: Sesa Goa’s Karnataka
operations continue to be impacted by the mining ban. Although management claims that
the Karnataka mine has been examined and cleared by concerned authorities, we expect
operations to restart only in 1Q FY13. The ongoing Shah Commission investigation, logistics
issues and the fact that the erstwhile Dempo mines need to become compliant as per new
regulations are key risks to volumes in Goa. New approvals in Goa are anyways on hold. We
estimate 17.3mn and 18.6mn tonnes of volumes in FY12 and FY13, respectively.
Other regulatory proposals to remain an overhang: The draft mining bill, recently
approved by the Cabinet recommends a mining tax equal to the royalty for non coal
companies, although the bill has not yet been approved by the parliament. If imposed, we
estimate the potential hit to EPS to be around 12%. The steel ministry is demanding an
export tax hike to 30% (20% currently). A further hike in export duty is a scenario we would
not rule out.
Capex commitment in WCL uncertain: Sesa Goa’s recent proposal to buy a 51% stake in
Western Cluster Ltd from Elenito Minerals was ratified by the local government. Although
the acquisition offers the much needed longer-term visibility for Sesa Goa to sustain
volumes, it will take substantial time and investment before it hits it initial production target
of 8mn tonnes. Although unconfirmed by the company, press reports (Source: The Hindu
Business Line, 29th July 2011) suggest that Sesa Goa will have to investment US$600mn
over the next three years. We have not built in any incremental investment in WCL by Sesa
in our forecasts.
ROE to drop sharply; 3-Underweight: We highlight that as of 1H FY12, more than one-half
of Sesa Goa’s balance sheet was locked in: 1) US$2.7bn investment in Cairn India for an
18.5% stake; 2) US$200mn in inter-corporate deposit to group Company, Vedanta
Aluminium Ltd; and 3) US$90mn investment in Western Cluster Ltd in Liberia. Even as we
expect core ROE to remain strong at 33%, we expect overall ROE to decline to 15% in
FY13E.
No comments:
Post a Comment