CMP: Rs. 170.65; Accumulate at Rs. 165 - Rs. 170 levels.
Medium to Long term Target: Rs. 208; STOP LOSS – Rs. 157.00; Market Cap: Rs. 14,831.21 Cr; 52 Week High/Low: Rs. 270.00 / Rs. 145.00
Medium to Long term Target: Rs. 208; STOP LOSS – Rs. 157.00; Market Cap: Rs. 14,831.21 Cr; 52 Week High/Low: Rs. 270.00 / Rs. 145.00
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. 148.58;
Face Value: Rs. 1.00; EPS: Rs. 10.86; Div: 400 % ; P/E: 15.71 times; Ind. P/E:
16.99; EV/EBITDA: 6.82.
Total Debt: 3,961.00 Cr; Enterprise Value: Rs. 18,478.00 Cr.
SESA GOA LIMITED: 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 mining operations in India include Codli, Sonshi/Surla &
Bicholim mines located in Goa & Narrain mine located in Karnataka. Sesagoa
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. In addition, the company produces basic, foundry and spheroidal grades
of pig iron to steel mills and foundries as well as slag as a by-product to the
cement industry and metallurgical coke, primarily low ash coke for foundries,
blast furnaces & ferrous alloy industries. Further it engages in generation
& distribution of power to Goa Electricity department & owns 30 MW
power plants in Goa that utilizes the waste heat gases from its coke making
& pig iron facilities as well as 30 MW waste heat recovery power plant. 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. 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 APAC Resources Limited of
Hong Kong & with Ferrexpo Plc of United Kingdom globally.
Investment Rationale:
SESA GOA (SESA) has iron ore reserves and
resources of 374 m tons in Goa and Karnataka. Goa's ore is medium grade and easy
to extract without blasting and crushing. The iron ore from Karnataka is of
high grade but found in rocky form, which necessitates blasting and crushing. SESA
is India's largest private sector iron ore exporter and is an important Indian
arm of Global natural resource player VEDANTA Resources PLC.
In February 2012
Vedanta Resources Plc restructured its subsidiaries by announcing merger of Sterlite
Industries into Sesa Goa in a 5:3 swap ratio. It involved transfer of Vedanta’s
70.5% stake in Vedanta Aluminum Ltd, 38.8% stake in Cairn India, 94.8% stake in
Malco to new entity “SESA-STERLITE” along with the associated debt of US$5.9
billion. The company received approvals from Competition Commission of India in
April 2012. The proposal received approval from 99 % from Vedanta shareholders,
89% of Sterlite shareholders & 79% of Sesagoa shareholders. This paved away
the difficulties for it getting Foreign Investment Promotion Board (FIPB)
approval & seeking court approvals. Post merger, Sesa-Sterlite will be one of the global commodity giant and its' earnings
will be less volatile, supported by more stable operations from Hindustan Zinc
and Cairn India. Post merger Sesa-Sterlite will have contribution of earnings of about 39% from Oil & Gas; 29% from Zinc & Lead; 17% from Iron Ore; 6% from Copper; 4% from Silver; 3% from Aluminium and 2% from Energy. As on mining from Indian operations, the cost of mining and transportation is significantly lower in Goa
(majority of operations) than in Karnataka and Orissa. Further, Indian miners
are at an advantage over Brazilian miners due to their proximity to China, the
largest customer. However, the current suspension of mining in Goa &
Karnataka has resulted in nil production from these mines. Supreme court
hearing is yet to start for Goa mining ban.
Outlook and Valuation:
SESA has acquired the remaining 49 % stake
in WCL, Liberia at Rs. 184 Cr. Shipments are expected to start from 4QFY14,
which will boost its earnings. SESA – STERLITE as a merged entity looks very
attractive in valuations. Though uncertainties regarding
the iron ore business persist, the impact on valuations is minor in view of the
imminent merger with Sterlite Industries. The High Court of Mumbai, Goa
bench is currently hearing shareholders' arguments against the merger. The
company has already presented its case. The Chennai High Court has heard both
sides and verdict is expected in this month of February 2013 .Though uncertainties regarding the iron ore business
persist, the impact on valuations is minor in view of the imminent merger with
Sterlite Industries and other group companies. Hearings have commenced in the
High Courts of Mumbai and Chennai. All other approvals from shareholders and other
courts in India and abroad have been received. The new entity “SESA-STERLITE”
on Some of The Part valuations comes at Rs. 208 which transfers into the market
capital of around Rs. 61,696 Cr. On merged entity basis, & at CMP of Rs. 170.65 the stock is trading at 4.35
x FY13E EPS of Rs. 39.20 and 5.06 x FY14E EPS of Rs. 33.70. Global peers including
BHP Billiton, Rio Tinto, Teck Resources are trading at 8 x one year forward earnings
& 4.2 x one year forward the EV/EBITDA. Considering the holding company structure
and operational constraints SESA-STERLITE could fetch a lower valuation as
compare to its global peers. One can buy SESAGOA Limited with a
target price of Rs. 208.00 for Medium to Long term investment & for shorter term it should be Rs. 185.00.
SOTP Valuation :-
Business Subsidiary FY13E
|
Value Per Share (in Rs.)
|
---|---|
SESAGOA Standalone
|
(-118.00)
|
HINDUSTAN ZINC
|
145.00
|
BALCO LTD
|
4.00
|
ZINC INTERNATIONAL
|
39.00
|
CAIRN INDIA
|
144.00
|
OTHER SEGMENTS
|
(-6.00)
|
TOTAL
|
208.00
|
KEY FINANCIALS | FY12 | FY13E | FY14E | FY15E |
---|---|---|---|---|
SALES (Rs. Crs) | 68,369.80 | 71,674.70 | 72,998.00 | 76,084.10 |
NET PROFIT(Rs. Crs) | 10,279.30 | 11,627.10 | 9,983.20 | 9,827.60 |
EPS (Rs.) | 34.70 | 39.20 | 33.70 | 33.10 |
PE (x) | 5.10 | 4.50 | 5.30 | 5.40 |
P/BV (x) | 0.80 | 0.70 | 0.70 | 0.60 |
EV/EBITDA (x) | 5.40 | 5.50 | 5.10 | 4.80 |
ROE (%) | 17.00 | 16.50 | 13.20 | 11.90 |
ROCE (%) | 25.30 | 24.80 | 13.30 | 12.60 |
I would buy SESAGOA LTD with a price target of Rs. 208 for Medium to Long term and for Shorter Term the target is Rs. 185.00 . 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. 157.00 on every purchase.
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