Sesa Goa – Accumulate - Target Price of Rs. 298:: Angel Broking

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Sesa Goa – Budget 2011-12 - Impact Analysis

Angel Broking maintains an Accumulate on Sesa Goa with a Target Price of Rs. 298.

Budget proposes higher export duty on iron ore: The Union Budget 2011-12 has

proposed raising the export duty on iron ore to ad valorem 20% on lumps and

fines. Currently, lumps are taxed at 15%, while fines are taxed at 5% on ad

valorem basis.

Higher export duty to impact Sesa Goa’s profitability: Sesa Goa generates ~90%

of its net sales from iron ore exports. Hence, the Budget proposal would result in

an increase in the company’s export duty expenses. In line with this, we have

raised our export duty expenses for Sesa Goa to `1,903cr for FY2012 v/s our

previous forecast of `485cr for FY2012. Our EBITDA estimate for FY2012 also

stands pruned by 26.1% to `4,008cr.

Outlook and valuation: We expect Sesa Goa’s iron ore sales volume growth to

remain muted in FY2012. Nevertheless, the spot iron ore prices have risen steeply

during the past three months on the back of improved demand from China.

Hence, going forward, we believe that rising expenses will be more than offset by

the rising iron ore prices. However, lumpiness in iron ore demand, huge swings in

the iron ore prices, logistical issues in Goa and stricter regulations imposed by the

government are the key concerns for Sesa Goa in the near-to-medium term.

At current levels, the Sesa stock trades at 3.0x FY2011E and 2.7x FY2012E

EV/EBITDA. On P/BV basis, the stock is available at 1.8x FY2011 and 1.5x

FY2012 estimates. We continue to value Sesa Goa at 3.5x FY2012 EV/EBITDA,

but at a lower target price of `298 (`356). We maintain our Accumulate

recommendation on the stock.