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Sesa Goa Limited
Stronger headwinds to
volumes, cut to Underperform
Visibility on volumes blurred, cut to U/P, PO cut to Rs280
Sesa announced the closure of its Orissa ops. (14% of FY12E volumes, 22% of
Reserve & Resources) due to inability to renew third party mining contracts. It is
already facing volume headwinds due to uncertainty around Karnataka export ban
(15% of vols.). Orissa mine closure aggravates volumes concerns. Also, mine life
reduces by 4 yrs to ~12 yrs (based on FY11 vols). Hence further de-rating is likely
in our view. We cut our EPS & forecast flat in FY12e despite strong iron ore
prices. We shift our PO to 0.85x NPV (NPV earlier) to factor in volumes risks from
Karnataka iron ore ban and weaker visibility on medium term volume growth.
Sesa to close Orissa operations, cutting EPS forecasts
Sesa has been unable to renew its third party mining contract for Thakurani mine
(R&R 78mn tons) on a long term basis on viable terms. It was operating the mine
on short term contracts after its long term contract expired in June 09. We have
cut our FY-10-13E vols. est. 8-13% as a result. We cut our FY11-13E EPS by 6-
13% and forecast FY11E EPS of Rs44.6 & Rs44.3 in FY12, (below consensus).
Downside risks from ongoing Karnataka export ban
High Court has recently upheld the Karnataka iron ore export ban, but confusion
around the validity period persists. Miners have challenged the verdict in the
Supreme Court (SC). SC has issued notice to State Govt. seeking its view. We
forecast 3.3mn tons (16% of vols.) from Karnataka in FY12e. We estimate our
FY12 EPS could be lower by 14% if ban continues in FY12.
Further de-rating likely on clouded vols. & lower mine life
Sesa trades at a premium to global avg. of 6.3x FY12E EPS despite muted EPS
growth. While multiples appear low, we note Sesa’s historical avg. P/E is 5.5x.
Thus, further de-rating on volume concerns & lower mine life (14 yrs) is possible.
A favorable resolution of the export ban should be positive in our view.
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