Sesa Goa (SESA IN, INR 163, Hold)
Taking cognizance of the Shah Commission’s report on illegal mining of iron ore in Goa, the state government has temporarily banned all mining activities. Sesa Goa (Sesa), Goa’s largest miner, will be severely hit by the ban and likely downward revision in mining limits. We cut our volume estimates 60%/44% for FY13/FY14. With weakness in Chinese iron ore prices leading to 22%/14% cut in our FY13E/ FY14E blended realisations, EBITDA is revised down 88%/53% for FY13E/FY14E. We are cautious on Sesa’s iron ore business; yet the imminent merger with Sterlite Industries and 20% stake in Cairn India (book value of INR157/share of Sesa) lead us to maintain ‘HOLD’ with a revised TP of INR191 (INR205 earlier).
Shah Commission cracks a whip on entire mining eco-system
Alleging irregularities, the Shah Commission has come down heavily on all parties, including MOEF, IBM, Goa Mines Department and wild life authorities. Recommendations include: (i) banning mining within 10kms of national sanctuaries (affects virtually all mines in Goa); (ii) imposing iron ore mining limit of 12.5mtpa in Goa (current production: 34mtpa); and (iii) imposing penalties equal to revenues earned from illegal mining. The alleged illegal mining is estimated by the Commission at total of 128mt over six years, including 47mt by Sesa Goa-Dempo.
Volume to take a knock
We expect the mining ban to last at least 12 months (similar to the one in Karnataka). We build in a 50% cut in mining limit for the company’s Goa operations (currently 16mtpa) leading to the volume cut as mentioned above.
Outlook and valuations: Merger saves the blushes; maintain ‘HOLD’
For the merged Sesa-Sterlite entity, the cut in Sesa’s estimates entails a downward EBITDA revision of 10%/5% for FY13/FY14. Maintain ‘HOLD/Sector Performer’ recommendation/rating on Sesa with revised TP of INR191/share. Considering the Sesa-Sterlite merger, we revise the TP of Sterlite from INR123 to INR115.
Regards,
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