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We maintain our bearish stance on Sesa Goa (Sesa) primarily on policy action concerns.
The government has hiked the iron ore export duty to 30% from the existing 20% on both
lumps and fines. We reduce our FY13 earnings by 9% on the back of volume moderation
and export duty hike. Further, with the Supreme Court ruling still pending on the Karnataka
mining ban issue, we are not expecting any volume accretion from Karnataka in Q4FY12
as well (as indicated by the company in its Q2FY12 results concall). With little growth
opportunities, Sesa has effectively been transformed into a holding company with Cairn
India (CIL) contributing ~66% of its valuation. We are lowering our target multiple (on
EV/EBITDA basis) from 4.5x to 4.0x to factor in the increased risks of regulation / policy
action and maintain our REDUCE call with a revised target price of Rs167/share.
• Iron ore export duty hiked to 30% from the existing 20% effective immediately:
The move is aimed at discouraging exports and preserving the ore for the domestic
steel industry. Further, majority of the company’s ore sales are exports and the move
is likely to negatively impact its FY13 earnings by ~6% (including CIL). We also believe
that the iron ore exports will come down gradually for the industry as a whole as the
government continues to play hardball against the miners.
• Clampdown continues, Maintain REDUCE rating: We remain cautious of the
upcoming M.B. Shah Commission report and this forms the basis of our REDUCE call
on Sesa Goa. Also, news articles suggest that the CEC has cleared only two of the 42
mines in Chitradurga, and Sesa’s mines are not among these two. Further, the EIA
report on Bellary suggests that the revival can be a long drawn process (can be upto 2
years in our view).
• Sesa reduced to a holding company coupled with hawkish government policy
stance: We have lowered our FY13 volumes by 18.5% and factor in the impact of the
increased export duty to 30%. We have also built in a lower EV/EBITDA multiple to
factor the increased regulation risks against export of iron ore from India. Effectively,
Sesa is now a holding company wherein CIL investment value is contributing higher
valuations than its core business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We maintain our bearish stance on Sesa Goa (Sesa) primarily on policy action concerns.
The government has hiked the iron ore export duty to 30% from the existing 20% on both
lumps and fines. We reduce our FY13 earnings by 9% on the back of volume moderation
and export duty hike. Further, with the Supreme Court ruling still pending on the Karnataka
mining ban issue, we are not expecting any volume accretion from Karnataka in Q4FY12
as well (as indicated by the company in its Q2FY12 results concall). With little growth
opportunities, Sesa has effectively been transformed into a holding company with Cairn
India (CIL) contributing ~66% of its valuation. We are lowering our target multiple (on
EV/EBITDA basis) from 4.5x to 4.0x to factor in the increased risks of regulation / policy
action and maintain our REDUCE call with a revised target price of Rs167/share.
• Iron ore export duty hiked to 30% from the existing 20% effective immediately:
The move is aimed at discouraging exports and preserving the ore for the domestic
steel industry. Further, majority of the company’s ore sales are exports and the move
is likely to negatively impact its FY13 earnings by ~6% (including CIL). We also believe
that the iron ore exports will come down gradually for the industry as a whole as the
government continues to play hardball against the miners.
• Clampdown continues, Maintain REDUCE rating: We remain cautious of the
upcoming M.B. Shah Commission report and this forms the basis of our REDUCE call
on Sesa Goa. Also, news articles suggest that the CEC has cleared only two of the 42
mines in Chitradurga, and Sesa’s mines are not among these two. Further, the EIA
report on Bellary suggests that the revival can be a long drawn process (can be upto 2
years in our view).
• Sesa reduced to a holding company coupled with hawkish government policy
stance: We have lowered our FY13 volumes by 18.5% and factor in the impact of the
increased export duty to 30%. We have also built in a lower EV/EBITDA multiple to
factor the increased regulation risks against export of iron ore from India. Effectively,
Sesa is now a holding company wherein CIL investment value is contributing higher
valuations than its core business.
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