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Topline disappointment
Sesa’s 1Q net profit fell a sharp 35% YoY – 19% below estimates due to
lower-than-expected volumes and ASPs. Logistical issues and lack of
approvals continue to impact Goa volumes. Higher domestic sales in
Karnataka and a drop in ore grades led to lower ASPs. The policy environment
remains tough for Sesa with mining approvals not coming through and
continued export restrictions in Karnataka. We cut FY12 EPS (excl Cairn) by
15% and maintain U-PF with a lower target price of Rs245.
Weak topline impacts 1Q results; net profit drops 35% YoY
In 1Q, Sesa’s iron ore volumes dropped 12% YoY due to logistical constraints and
lack of approvals in Goa and export restrictions in Karnataka. While the Supreme
Court has stayed iron ore export ban in Karnataka, the state government has not
yet issued permits for transportation of iron ore for exports. As a result, Sesa had
to sell all its Karnataka ore in the domestic market. In 1Q, domestic iron ore
prices were below export parity and this combined with a drop in the grade of iron
ore led to 1Q ASPs declining 14% QoQ despite flat spot China prices. Higher
domestic sales, however, led to lower costs but this was not enough. 1Q sales fell
13% YoY while EBITDA fell 26% YoY. A sharp rise in tax rates due to the end of
tax breaks pushed net profit down a further 35% YoY.
Some improvement is likely in balance FY12
Sesa is still targeting 15% volume growth in FY12 despite the 12% YoY volume
drop in 1Q. We believe that some volume growth is achievable given that Sesa is
carrying 3.7mt of stock and could sell more in the domestic market as supply
from other private miners is constrained due to the Supreme Court ordered
surveying of mines in the state. We build in 10% volume growth in our numbers.
Moreover, domestic iron ore prices have improved in July as per Sesa (JSW
corroborates this) and this should improve ASPs in coming quarters. We also
expect exports to resume from Karnataka at some point, possibly in 2H.
We cut FY12 EPS (excl Cairn) by 15%; maintain U-PF
The last year has been evidence of the policy risks that confront Sesa - lack of
new mining approvals, Karnataka export ban, export duty hike, government
driven logistical constraints. We believe that a reversal here is crucial for Sesa’s
stock to perform. In the absence of this, iron ore prices become the sole lever for
the stock, where we have a negative view. We cut FY12 iron ore profits by 15%
factoring in lower volumes and ASPs. EPS falls 23% as we now assume that
Sesa’s stake in Cairn will go up to 20% by 2Q-end. Our TP drops to Rs245 from
Rs270 as we cut Cairn’s valuation to Rs330/sh from Rs395. Our TP assumes– 1)
Mining approvals to eventually come, 2) Addition of further 160mt to reserves.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Topline disappointment
Sesa’s 1Q net profit fell a sharp 35% YoY – 19% below estimates due to
lower-than-expected volumes and ASPs. Logistical issues and lack of
approvals continue to impact Goa volumes. Higher domestic sales in
Karnataka and a drop in ore grades led to lower ASPs. The policy environment
remains tough for Sesa with mining approvals not coming through and
continued export restrictions in Karnataka. We cut FY12 EPS (excl Cairn) by
15% and maintain U-PF with a lower target price of Rs245.
Weak topline impacts 1Q results; net profit drops 35% YoY
In 1Q, Sesa’s iron ore volumes dropped 12% YoY due to logistical constraints and
lack of approvals in Goa and export restrictions in Karnataka. While the Supreme
Court has stayed iron ore export ban in Karnataka, the state government has not
yet issued permits for transportation of iron ore for exports. As a result, Sesa had
to sell all its Karnataka ore in the domestic market. In 1Q, domestic iron ore
prices were below export parity and this combined with a drop in the grade of iron
ore led to 1Q ASPs declining 14% QoQ despite flat spot China prices. Higher
domestic sales, however, led to lower costs but this was not enough. 1Q sales fell
13% YoY while EBITDA fell 26% YoY. A sharp rise in tax rates due to the end of
tax breaks pushed net profit down a further 35% YoY.
Some improvement is likely in balance FY12
Sesa is still targeting 15% volume growth in FY12 despite the 12% YoY volume
drop in 1Q. We believe that some volume growth is achievable given that Sesa is
carrying 3.7mt of stock and could sell more in the domestic market as supply
from other private miners is constrained due to the Supreme Court ordered
surveying of mines in the state. We build in 10% volume growth in our numbers.
Moreover, domestic iron ore prices have improved in July as per Sesa (JSW
corroborates this) and this should improve ASPs in coming quarters. We also
expect exports to resume from Karnataka at some point, possibly in 2H.
We cut FY12 EPS (excl Cairn) by 15%; maintain U-PF
The last year has been evidence of the policy risks that confront Sesa - lack of
new mining approvals, Karnataka export ban, export duty hike, government
driven logistical constraints. We believe that a reversal here is crucial for Sesa’s
stock to perform. In the absence of this, iron ore prices become the sole lever for
the stock, where we have a negative view. We cut FY12 iron ore profits by 15%
factoring in lower volumes and ASPs. EPS falls 23% as we now assume that
Sesa’s stake in Cairn will go up to 20% by 2Q-end. Our TP drops to Rs245 from
Rs270 as we cut Cairn’s valuation to Rs330/sh from Rs395. Our TP assumes– 1)
Mining approvals to eventually come, 2) Addition of further 160mt to reserves.
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