SESA GOA LTD : Getting out from storm !!!

Scrip Code: 500295 / SESAGOA

CMP:  Rs. 234.90; Buy at current levels.
Short term Target: Rs. 270, 6 month Target – Rs. 350; STOP LOSS – Rs. 216.10; Market Cap: Rs. 20,415.19 cr; 52 Week High/Low: Rs. 333.40 / Rs. 148.30

Total Shares: 86,91,01,423 shares; Promoters : 47,91,13,619 shares –55.13 %; Total Public holding : 38,99,87,804 shares – 44.87 %; Book Value: Rs. 133.34; Face Value: Rs. 1.00; EPS: Rs. 25.80; Div: 350.00 % ; P/E: 9.10 times; Ind. P/E: 19.44; EV/EBITDA: 4.70.

Total Debt: 1015.97 Cr; Enterprise Value: Rs. 22,127.32 Cr.

SESA GOA LTD:  SESA GOA Ltd was incorporated in 1954 and is based in Panji, Goa, India. SESAGOA is engaged in exploration, mining and processing of iron-ore. The Company operates in three business segments namely iron ore, metallurgical coke and pig iron. The pig iron business focuses on the domestic Indian market, especially to foundries and steel mills in western and southern India. It also exports to the Middle-East and South East Asia. SESA GOA is India's largest producer & exporter of iron ore in the private sector which currently accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron ore mining company in the world. Its mines are mainly located in the Goa, Karnataka & Orissa. It exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe.  It also has mining interests in Western Cluster Iron Ore project, Liberia. The company sells its iron ore primarily in China, Japan, Korea, India, and Europe. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51 % in Sesa Goa from Mitsui & Co, Japan, for US$ 981 million. SESAGOA owns or have the rights of reserves & resources consisting of 306 million tonnes of iron ore. In April 2011, the Company acquired 10.4 % stake in Cairn India Ltd (CIL) from Petronas International Corporation Ltd (Petronas). In March 2011, Sesa Goa acquired the assets of steel plant unit of Bellary Steel and Alloys Limited (BSAL). SESA GOA is compared with NMDC Limited, Godawari Power & Ispat Limited in India and with Ferrexpo Plc globally.

Investment Rationale:

Iron ore prices have recently fell sharply from US$180/ tonne and now are recovering to US$145/ tonne. Also Iron ore imports earlier dipped in China due to fall in steel production till November, 2011; however, imports again rebounded in December 2011 supported by higher steel production which boosts the prices. The exports from India continued to remain lower. Inventory of iron ore at Chinese ports have been steady at 95 mt. During the quarter 0.64 mt of iron ore was sold from Karnataka through e-auction. Sesa Goa expects that the Karnataka issue to get resolved by Q4FY12 and to contribute about 6 mt in FY13 taking overall volumes to around 20 mt. The Shah Commission continues its verification in Goa and report is expected by March 2012. Goan ores being Haematite in nature is not suitable for pelletization which may cost SESA by little bit. Also the Western Cluster (Liberia project) is on track with encouraging R&R findings the first shipment is expected in FY14 which will bost Sesa Goa’s revenue substantially. Also SESAGOA’s total debt including forex debt constitutes of US$ 400 mn (FCCB of US$ 215 mn) which is low as compared to its industry peers which gives one a comfort to invest in the stock. There are some likely events due in FY13, which could have significant bearing on the company’s operational performance in FY13, Such as If the Supreme Court lifts ban on mining in Karnataka and SESAGOA is allowed to restart mining activities in Karnataka would boost FY13 sales volume tremendously which is POSITIVE for Sesa – the Supreme Court hearing is due by Q4FY12; Under the National Mineral policy the royalty rates are revised once in every 3 years and this time it is due in August 2012, and considering the recent regulatory environment it is highly possible that there may be a rate hike as the rate revision which is exected that it will not impact much negatively for Sesa Goa. Of course there could be 12 % negative impact in FY13 EPS of Sesa if the MMDR bill is passed in its same form and fashion, which is expected to be tabled in Budget session of the Parliament, which will be from March 14 to March 17^th 2012. But I believe that the markets have already factored in these negatives in the stock prices. Also the Carin will contribute upto 20 % in the bottom line as profit from associates. On SOTP basis the valuation of the iron ore business comes at Rs. 87/share which is 3.5 x the FY13E EV/EBITDA and is in discount to upto 15 % from its global peers. The stake in CAIRN INDIA is been valued at 30 % discount to current market cap which comes to Rs. 107/share. Taking this into consideration the target price of SESAGOA comes at Rs. 250           

Outlook and Valuation:

The Ministry of Commerce has hiked export duty on iron ore from 20 % to 30 % for both lumps and fines. Sesa Goa exports close to 90 % of its total sales, and hence an export duty hike could lead to EBITDA estimates coming down by close to 20 % in FY13F-FY14F and earnings estimates coming down by close to 25 %. Indian exports of iron ore have come down by 40 % - 45 % during the past two years on account of earlier export duty hike of 20 % from 10 % and an also by export ban/mining ban in Karnataka. With such restrictions on transportation of ore in Goa, the local state Goa government has also suffered. All these factors together resulted in significant downturn in iron ore exports from India. It is believed that the above increase in export duty won’t impact exports significantly as - firstly the majority of iron ore being exported is from Goa, which produces low-grade iron ore and doesn’t have major demand in India. At the same time, transportation of ore from Goa will be very costly for domestic steelmakers due to logistic issues; and secondly even after export duty hike, companies such as Sesa Goa will have a decent margin (25- 30 %) and hence exports should continue. At the current market price of Rs. 234.00, the stock is trading at a PE of 5.20 x FY12E and 4.25 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 27.10 in FY12E and Rs. 42.60 in FY13E. One can buy SESA GOA Ltd with a target price of Rs. 250.00 for Medium to Long term investment.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	5,858.30	9,205.10	7,776.10	8,462.10
NET PROFIT (Rs. Crs)	2,629.10	4,209.10	2,351.10	3,706.00
EPS (Rs.)	31.60	48.40	27.10	42.60
PE (x)	6.40	4.20	7.40	4.70
P/BV (x)	2.10	1.40	1.20	1.00
EV/EBITDA (x)	5.20	3.40	7.40	7.10
ROE (%)	41.60	40.60	17.00	22.30
ROCE (%)	47.20	47.00	18.50	14.80

I would buy SESAGOA Ltd with a price target of Rs. 350 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 216.10 on every purchase.

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