SESA GOA : Accumulate, Great business at great price !

Scrip Code: 500295 / SESAGOA

CMP:  Rs. 263.80; Buy at current levels ;Short term Target: Rs. 280.00 , LT – Rs. 350 ;

Market Cap: Rs. 22,678.95 Cr ;

52 Week High/Low: Rs. 495.00 / Rs. 254.75 ; Total Shares: 85,97,02,559 shares; Promoters : 47,91,13,619 shares – 55.73 %; Total Public holding : 9,95,10,958 shares – 11.58 %; Book Value: Rs. 86.75; Face Value: Rs. 1.00; EPS: Rs. 37.07; Div: 325 % ; P/E: 7.91 times; Ind P/E: 34.99; EV/EBITDA: 8.94 ; Total Debt: Rs. 1,992.80 Cr; Enterprise Value: Rs. 25,622.57 Cr.

Sesa Goa incorporated in 1954, is India's largest producer & exporter of iron ore in the private sector and it currently accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron ore mining company. Its mines are located in the Goa, Karnataka & Orissa. It exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe.  In fiscal 2010, Sesa Goa produced 21.4 million tonnes and sold 20.5 million tonnes of iron ore. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51 % in Sesa Goa from Mitsui & Co, Japan, for US$ 981 million.   As of 31 March 2010, SESAGOA own or have the rights to reserves & resources consisting of 275 million tonnes of iron ore.

Budget 2011-12 - Impact Analysis

Budget proposes higher export duty on iron ore: The Union Budget 2011-12 has proposed raising the export duty on iron ore to ad volerm 20% on lumps and fines. Currently, lumps are taxed at 15%, while fines are taxed at 5% on ad volerm 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, I have estimated the export duty expenses for Sesa Goa to be Rs.1,903 Cr for FY2012. EBITDA estimate for FY2012 stands by 26.1% to Rs. 4,008 Cr.

Outlook and valuation:

 I 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, it is believed 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. I continue to value Sesa Goa at 3.5x FY2012 EV/EBITDA, but at target price of Rs. 280. I recommend Accumulate on the stock.

Assumptions

Particulars	FY11E	FY12E
Iron Ore
Sales volume (mn tonnes)	20.3	30.4
Average realisation (US$/tonne)	80.0	90.0
Coke
Sales volume (tonnes)	2,60,000	3,65,000
Average realisation (US$/tonne)	400	507
Pig Iron
Sales volume (tonnes)	2,37,500	4,06,250
Average realisation (US$/tonne)	475	578
US $ / Re	45.6	45.0

KEY FINANCIALS	2010	2011E	2012E
SALES (Rs. crs)	5,798	7,985	9,513
NET PROFIT (Rs. crs)	2,629	3,793	3055
EPS (Rs.)	29.6	42.6	34.3
PE (x)	8.9	6.2	7.6
PRICE/BOOK (x)	2.8	1.8	1.5
EV/EBITDA (x)	5.5	3.0	2.7
RoNW (%)	41.6	36.0	21.1
RoCE (%)	41.7	35.8	26.7

UPDATE - SESA GOA announced on 22nd March  2011, that it has acquired the assets of upcoming Steel Plant Unit of BELLARY STEEL & ALLOYS LTD (BSAL) for an all Cash deal at Rs. 220 Crore.

BSAL was in process of setting up a 0.5 mtpa Steel plant at Bellary. The properties of the under construction plant has free hold land of 700 acres, buliding & structures, plant & machinery and other assets of steel plant. The asset is transfered on As is where is basis as of 22 March 2011.

Sesa Goa is currently assessing the best way for commissioning the steel plant at the earliest. The plant is located at Karnataka having close proximity of national high way, railway & source of water.

I maintain my accumulation status on SESAGOA with the price target of Rs. 280 in short term. For long term my target is of Rs.350. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.