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Sesa Goa (SESA)
Metals & Mining
Volumes decline; high risk to guidance. Sesa’s reported1QFY12 EBITDA of Rs11.5
bn declined 26% yoy as the company dealt with a twin impact of increase in cost
(export duty, freight costs etc.) and volumes decline. Net income impact was higher on
(1) expiry of EOU tax benefits and (2) decline in treasury income as the company
completed purchase of stake in Cairn India. We believe there is high risk to company’s
FY2012E volume guidance. We maintain our REDUCE rating; we will review our
earnings estimate post earnings call.
A weak quarter on all counts
Even as Sesa’s performance was in line with our estimate, EBITDA and net income decline despite
record iron ore prices is concerning.
Iron ore shipments declined 12.2% yoy to 4.3mn dry metric tonnes (dmt). Volume decline was
a function of (1) decline in shipment from Goa mines due to restrictions placed on movement
of trucks; and (2) termination of third party mining agreement in Orissa. We believe there is
significant risk to Sesa iron ore sales guidance of around 21.5mn dmt.
Iron ore realization at US$101/dmt (-11% qoq) was materially lower than international spot
prices due to (1) marginal deterioration in grade of iron ore sold; and (2) tilt in mix of shipments
towards domestic markets; Sesa would have shipped 1mn+ tonnes of iron ore from the
Karnataka mine domestically versus negligible quantity in 1QFY11 and 0.5mn tonnes in 4QFY11.
1QFY12 EBITDA declined 26% yoy to Rs11.5 bn due to (1) increase in export duty to 20% on
fines as well lumps versus 5% on fines and 15% on lumps in 1QFY11; (2) increase in rail
transportation costs and (3) decline in iron ore deliveries.
Net income declined 35.4% yoy due to (1) 26% yoy decline in EBITDA; (2) increase in tax rates
to 31.2% versus 17.8% due to expiry of tax benefits to EOUs and (3) decline in treasury income
as the company completed purchase of 18.5% of Cairn India’s equity. Sesa’s cash and cash
equivalents declined to Rs22.5 bn from Rs106.8 bn in 4QFY11. Note that Sesa spent Rs121 bn
in acquiring stake in Cairn India.
To revisit our estimates post earnings call
We will revisit our estimates post earnings call. Our fair value of Rs305 will likely reduce. Risk to
volumes estimates, little progress on EC clearance for expansion of production and unnecessary
diversion of cash flow into acquiring shares of Cairn India will weigh on the stock. Imposition of
mining can potentially reduce EBITDA by 9.5%, earnings by 8.4% and fair value by Rs25. REDUCE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa (SESA)
Metals & Mining
Volumes decline; high risk to guidance. Sesa’s reported1QFY12 EBITDA of Rs11.5
bn declined 26% yoy as the company dealt with a twin impact of increase in cost
(export duty, freight costs etc.) and volumes decline. Net income impact was higher on
(1) expiry of EOU tax benefits and (2) decline in treasury income as the company
completed purchase of stake in Cairn India. We believe there is high risk to company’s
FY2012E volume guidance. We maintain our REDUCE rating; we will review our
earnings estimate post earnings call.
A weak quarter on all counts
Even as Sesa’s performance was in line with our estimate, EBITDA and net income decline despite
record iron ore prices is concerning.
Iron ore shipments declined 12.2% yoy to 4.3mn dry metric tonnes (dmt). Volume decline was
a function of (1) decline in shipment from Goa mines due to restrictions placed on movement
of trucks; and (2) termination of third party mining agreement in Orissa. We believe there is
significant risk to Sesa iron ore sales guidance of around 21.5mn dmt.
Iron ore realization at US$101/dmt (-11% qoq) was materially lower than international spot
prices due to (1) marginal deterioration in grade of iron ore sold; and (2) tilt in mix of shipments
towards domestic markets; Sesa would have shipped 1mn+ tonnes of iron ore from the
Karnataka mine domestically versus negligible quantity in 1QFY11 and 0.5mn tonnes in 4QFY11.
1QFY12 EBITDA declined 26% yoy to Rs11.5 bn due to (1) increase in export duty to 20% on
fines as well lumps versus 5% on fines and 15% on lumps in 1QFY11; (2) increase in rail
transportation costs and (3) decline in iron ore deliveries.
Net income declined 35.4% yoy due to (1) 26% yoy decline in EBITDA; (2) increase in tax rates
to 31.2% versus 17.8% due to expiry of tax benefits to EOUs and (3) decline in treasury income
as the company completed purchase of 18.5% of Cairn India’s equity. Sesa’s cash and cash
equivalents declined to Rs22.5 bn from Rs106.8 bn in 4QFY11. Note that Sesa spent Rs121 bn
in acquiring stake in Cairn India.
To revisit our estimates post earnings call
We will revisit our estimates post earnings call. Our fair value of Rs305 will likely reduce. Risk to
volumes estimates, little progress on EC clearance for expansion of production and unnecessary
diversion of cash flow into acquiring shares of Cairn India will weigh on the stock. Imposition of
mining can potentially reduce EBITDA by 9.5%, earnings by 8.4% and fair value by Rs25. REDUCE.
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