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.

Renewable energy much better than Nuclear disaster

Japan's nuclear reactor blasts fearing melt down

JAPAN met with an unforeseen disaster making its nuclear reactors blast due to earth quakes, this has raised the question about dependency of countries like India on Nuclear power plants for the need of power supply's. Many environmentalist world wide are questioning on the safety of reactors/radiation and its effects on human life's. Even our D-street have concerns and there is a school of thought about India would never be able to complete its nuclear projects in next 15 - 20 years due to many political pressures and hence will not able to satisfy the power demands. 

  I gave a thought on it and here are some of the facts which somewhat we already know & some in my opinion I want to draw your attention to –

1    Maharashtra power demand is 16,000 Mw currently.

2    State owned Mahagenco provides 13,500 Mw, which includes 1,500 Mw purchased from outside.

3    Demand in maharashtra is expected to grow to 23,800 Mw.

4    Mahagenco to provide additional 5,000 Mw.

Now to meet these demands Jaitapur Nuclear Power Project was proposed & similar other nuclear power projects were proposed. As Japan met with a nuclear disaster, Indian govt. have started facing the political pressure to drop these nuclear projects concerning public safety. And the only option to meet the ever growing power demands is Renewable Energy which are cost effective & more environments friendly.

Let’s compare the Capital costs of these projects –

1    Jaitapur Nuclear Power Project is of 9,900 Mw in 938 hectares of total land, which will have 6 reactors of 1,650 Mw capacities each, to be built in collaboration of Nuclear Power Corporation of India Ltd and AREVA a French company. These European Pressurised Reactors (EPR’s) will cost Rs. 20 Cr/Mw or Rs. 8.00 – Rs.9.00 / Unit.

2    Pressurized heavy water reactor with indigenous technology costs Rs. 8 Cr/Mw. Needs about 1 to 4 Square Kilometers of land.

3    Jawaharlal Nehru National Solar Mission to generate 1,000 Mw by 2013 & 20 Gw by 2022 cost to be Rs. 15 Cr/Mw and needs 6.4 Acres of land. (1Gw = 1,000Mw)

4    Indian Wind Energy has installed capacity of 11,807 Mw.  As per Indian Wind Energy Association the potential of electricity generated by wind in India is about 65,000 Mw. Currently wind energy cost Rs. 5 Cr – Rs. 5.6 Cr/Mw and needs about 0.25 Acres of land for 1Mw.

5    Hydro projects cost Rs. 5.4 Cr – Rs. 6 Cr/Mw, Coal Projects cost Rs. 5 Cr/Mw, Bio mass Gas project cost Rs. 5.5 Cr – Rs. 6 Cr/Mw.

So its makes sense to go towards Renewable Energy, India produces 1.67 lakhs Mw against the demand of 3.70 lakhs Mw by 2017 - 18. The per capita power consumption in our country is at 700 units which is much lower than 11,000 in US & 2,800 units in China.

The Power Mix in India (2010) is - Thermal: 65 %; Hydro: 25 %; Nuclear: 3%; Renewable: 7 %.

The Installed capacity as on 30th November 2010 - Coal is at 89,778.38 Mw; Hydro is at 37,367.40 Mw; Gas is at 17,624.85 Mw; Diesel is at 1,199.75 Mw; Nuclear is at 4,560 Mw; Wind & Solar energy is at 16,786.98 Mw.

This shows that even if the nuclear power projects which contributes 4,560 Mw are not allowed due any reasons we still can manage to mop up our power demands. We can utilise this money by giving subsidies & financing to renewable energies. Looking at the current scenario I think that govt. will have no option rather than to promote alternative energy resources and companies like SUZLON ENERGY will gain from it. NUCLEAR PLANT OR NO NUCLEAR PLANT INDIA WILL SHINE AS IT WAS & AS IT IS……..

VISIT HOME PAGE - CLICK HERE

Reliance Industries : A great wealth being created.

Scrip Code: 500325 / RELIANCE

CMP:  Rs. 992.05; Buy at Rs. 930 - Rs.950 for LT.
Short term Target: Rs. 1030.00, LT – Rs. 1350
Market Cap: Rs. 3,24,659.03 cr.
52 Week High/Low: Rs. 1149.70 / Rs. 885.10

Total Shares: 327,26,07,533 shares; Promoters : 146,39,23,343 shares – 44.73 %; Total Public holding : 58,60,93,502 shares – 17.91 %; Book Value: Rs. 392.21; Face Value: Rs. 10.00; EPS: Rs. 59.95; Div: 70 % ; P/E: 16.54 times; Ind P/E: 17.80; EV/EBITDA: 11.72 .

Total Debt: Rs. 62536.25 cr; Enterprise Value: Rs. 3,87,195.28 cr

Reliance Industries out put is of 1.8 bn cubic feet of gas a day which is equal to 1,25,000 barrels of oil production per day a nearly 40 % of India’s total gas production, all comes from D6. RIL owns 2,7o,000 Sq Kilometers of exploration circles or 28 blocks.

British Petroleum (BP) global oil major has announced an historic deal with India’s largest private sector oil major Reliance Industries to buy RIL’s 30% stake in 23 oil and gas blocks on 21^st February 2011. As per the partnership deal, BP will buy 30% stake in 23 oil & gas production sharing contracts that RIL operates in India, including the producing KG-D6 blocks at $7.2 billion (Rs.44.99/$) Rs. 32400 cr, and will also form 50:50 JV for sourcing and marketing gas in India. This JV is also an attempt to accelerate the creation of infrastructure for receiving, transporting and marketing natural gas in India. RIL will get $7.2bn in 3 trenches - $2 bn as upfront payment, further $2.3 bn on completion of deal & the final payment of $3 bn in October 2011. BP could invest US $20bn in RIL which would go to Reliance Gas Transportation Infrastructure Ltd. This deal is positive for RIL as the combined expertise of both the parties would result into optimisation of producing blocks and enhancing the resources in exploratory blocks. The transaction amount gives a value of Rs. 363/share to the east coast blocks, as BP is expected to incrementally incur its share of capital expenditure into the commercialisation and development of blocks, which have already been factored in for valuation.

Outlook and Valuation

The deal is an earnings & value accretive in the long term, considering the technical expertise BP brings on table. Once the deal goes through, dip in valuation on account of shedding 30% share in east coast blocks will be offset by cash consideration and re-rating of blocks on account of synergy arising out technical expertise of both the proficient parties. This deal will put RIL in a position to be “DEBT FREE”. My view on the stock is of BUY with a price target of Rs. 1,160 when the share price is at Rs. 957.00

Y/E March (Rs. Cr)	2009	2010	2011E	2012E
SALES (Rs. crs)	1,51,224	2,03,740	2,43,815	2,83,665
NET PROFIT (Rs. crs)	14,969	15,897	19,835	22,305
EPS (Rs.)	50.3	53.4	66.6	74.9
PE (x)	19.0	17.9	14.4	12.8
PRICE/BOOK (x)	2.3	2.0	1.8	1.6
EV/EBITDA (x)	15.6	11.8	9.3	8.1

Evaluation of RIL’s east coast blocks

Prospective Basins	Estimated 2P Reserves (mmboe)
KG - Basin	2,413
MA - Oil	150
NEC - 25	793
D3	884
D9	512
Total	4,751
Value given by British Petro.
Deal Value (Rs. Cr @ Rs. 45/$)	1,08,000
EV/Share (Rs.)	363

Union Budget 2011-12 -

In this budget finance minister proposed the Minimum Alternate Tax (MAT) on Special Economic Zones (SEZ) & Limited Liability Partnership (LLP) from 1^st April 2012. LLPs will have to pay MAT at 18.5 % but will be exempted from Dividend Distribution Tax of 17 % on the dividend declared. In LLPs MAT will be known as Alternate Minimum Tax (AMT). AMT will be applicable to LLPs @ 18.5 % AMT will apply to the adjusted income & not on adjusted book profit. AMT credit is available to an LLP for 10 years. The LLPs was used by some promoters of cooperates to save tax on dividends declared by their companies. RIL promoters created 29 LLPs in August 2010 which will own 32.75 % of Reliance Industries. These 29 LLPs collectively earned Rs.750.77 cr as dividend last year saving both MAT & DDT.  But when the new AMT norm becomes affective these LLPs will have to pay tax of Rs.139 cr if the RIL maintains the same dividend rates.

CLICK HERE FOR RIL SHARE HOLDING PATTERN

UNION BUDGET 2011 - 12 : HIGHLIGHTS

GROSS DOMESTIC PRODUCT ESTIMATES IN FY12 ARE  Rs. 71,57,000 LAKH CR AND AT 2004-05 PRICES 48,86,000 LAKH CR.

TOTAL SUBSIDES AT Rs. 1.43 LAKH CR.

FERTILIZER SUBSIDIES AT  Rs. 50,000 CR,
FOOD SUBSIDIES AT  Rs. 60,500 CR
OIL & PETROL SUBSIDIES AT  Rs. 23,600 CR.

FISCAL DEFICIT AT Rs. 4,12,817 CR.

MARKET LOANS = Rs. 3,43,000 CR

STATE PF = Rs. 10,000 CR.
EXTERNAL AID = Rs.14,500 CR.

LESS OTHERS = Rs. 13,866 CR.
THE CENTER'S EXPENDITURE 2011 - 12 IS PROJECTED AT Rs. 12,57,729 Cr.

IN FLOW (Rs. in Cr)
TAX RECEIPTS	6,64,457
CORPORATE TAX	3,59,990
INCOME TAX	1,72,026
CUSTOMS DUTY	1,51,700
EXCISE DUTY	1,64,116
SERVICE TAX	82,000
TAX OF UNION TERRITORY	1,973

NON TAX RECEIPTS	AMOUNT
INTEREST RECEIPTS	19,578
DIVIDENDS & PROFITS	42,624
EXTERNAL GRANTS	2,173
OTHER NON TAX RECEIPTS	59,891
RECEIPTS OF UNION TERRITORY	1,169
TOTAL	1,25,435

NON DEBT CAPITAL RECEIPTS	55,020
RECOVERY OF LOANS & ADVANCES	15,020
MISC. CAPITAL RECEIPTS	40,000

* Out of the Tax Receipts the Centre has to keep aside States share of Rs. 2,63,458 cr & for Calamity & Contingency Fund of Rs. 4,525 crs.

OUT FLOW (Rs. in Cr)
PLAN EXPENDITURE	4,41,547
NON PLAN EXPENDITURE	8,16,182
OR
REVENUE EXPENDITURE	10,97,162
CAPITAL EXPENDITURE	1,60,567
DEFENCE	1,64,415
SUBSIDIES	1,43,570
GRANTS TO STATES & UTs	66,311
PENSIONS	54,521
INTEREST PAYMENTS	2,67,986
LOANS TO PSUs	496
OTHER GENERAL SERVICES	19,105
LESS OTHERS	368
CENTRAL PLAN	3,35,521
POSTAL DEFICIT	5,018
EXPENSES of UTs with out Legislature	3,592
NON PLAN CAPITAL OUTLAY	13,212
ECONOMIC SERVICES	25,391
GRANTS TO FOREIGN GOVT.	2,301
CENTRAL PLAN AID TO STATES	1,06,026
SOCIAL SERVICES	20,862
POLICE SERVICE	29,685

SOME MORE POINTS FROM BUDGET

à    PSU Banks to get Rs. 20157 cr in FY12.

à    Priority Home Loans up from Rs. 20 lakhs to Rs. 25 lakhs.

à    1 % Interest subvention on Home Loans of Rs. 15 lakhs.

à    FY12 disinvestment target Rs. 40,000 crs.

à    Equity Fund of Rs. 100 cr for Micro finance companies.

à    Farm GDP was 5.4 % in FY11 in GDP growth of 8.6 %.

à    To give 3 % Interest subsidy to farmers on early payment of loans.

à    To allow Foreign Direct Investments in Mutual Funds.

à    Cold Storage Chains will be given Infrastructure status.

à    Exemption of Rs. 20,000 on investment in Infra bonds continued for 1 more year.

à    Tax free bonds of Rs. 30,000 cr for Infrastructure sectors to be declared.

à    Rural infra bonds of Rs. 18,000 cr to be declared.

à    Social Schemes allocate Rs. 58,000 crs.

à    Education sector allocated Rs. 52,057 cr up by 24 % in FY12.

à    Corporate surcharge reduced from 7.5 % to 5 %.

à    Dividend from foreign subsidiary to Indian companies down from 30 % to 15 %.

à    Minimum Alternate Tax raised from 18 % to 18.5 % of Book profit.

à    Developer of SEZ & SEZ operators, LLPs brought under MAT.

à    Ship owners allowed duty free import on spare parts.

à    Custom duty on imports of Micro irrigation systems down from 7.4 % to 5 %.

à    10 % Excise duty on Branded garments

à    20 % Ad volerm export duty on Iron ore.

à    NO Excise duty on Ultra Mega Power Projects equipments.

à    Air Conditioner restaurants serving liquor, hotels charging Rs.1000/day will attract Service Tax.

à    Service Tax on Domestic Air tickets Rs. 50, & on international tickets Rs.250

Jain Irrigation Systems Ltd : Best AGRI Sector BUY.BUDGET STOCK

Scrip Code: 500219 / JISLJALEQS

CMP:  Rs. 207.75; Buy at Rs. 200 - 206 levels.
Short term Target: Rs. 230.00
Best buy : At Rs. 180 - Rs. 195 , LT - Rs. 350. Market Cap: Rs. 7,921.3 cr.
52 Week High/Low: Rs. 258.5 / Rs. 157

Total Shares: 38,11,86,460 shares; Promoters : 11,72,43,245 shs – 30.76 %; Total Public holding : 26,15,17,545 shs – 68.61 %;

Book Value: Rs. 35.18; Face Value: Rs. 2.00; EPS: Rs. 7.95; Div: 45 %.

P/E: 26.14 times; Ind P/E: 29.62; EV/EBITDA: 14.79
Total Debt: Rs. 8,942.25 cr; Enterprise Value: Rs. 48,656.54 cr

Jain Irrigation Ltd has multi product industrial profile & manufacturers Drip and Sprinkler Irrigation Systems and Components; PVC, Polyethylene (HDPE, MDPE) & Polypropylene Piping Systems; Plastic Sheets (PVC & PC sheets); Dehydrated Onions and Vegetables; Processed Fruits; Tissue Culture, Hybrid & Grafted Plants; Greenhouses, Poly and Shade Houses; Bio-fertilizers; Solar Water Heating Systems and Solar Photovoltaic Appliances (Solar lighting systems) and Bio- energy sources. Company renders consultancy for complete or partial project planning and implementation e.g. Watershed or Wasteland and / or Crop Selection and Rotation.

About Company - It is the market leader in micro irrigation systems (MIS) in India with over 50 % market share. Having been present in this segment for more than 15 years, there is very strong association of the company with MIS in rural India. Its dealer and sales network is also significantly larger than any of its competitors. As a result, Jain Irrigation is expected to retain its market leadership in the future. MIS alone contributes to more than 50% of its revenues and 70% of EBITDA. Due to its large subsidy business, management of working capital cycle has been a key concern for Jain Irrigation and is a risk to its growth. However, the company has now started factoring its receivables, which should help keep working capital cycle in check. JISL is the biggest player and controls over 1/3rd of the market in drip irrigation, second is Netafim from Israel, Finolex Plasson, Premier Irrigation Adritec.

Future scope of business -  So far only about 4.5 mn hectares (ha) has been brought under MIS compared to government target of 18 mn ha by FY12 and addressable area of 70 mn ha. The government subsidies a minimum of 50% of cost of installation and budget allocation to MIS has been in increasing trends. In FY11, central budget allocation was more than doubled to Rs.1000 cr and recently it was accorded “National Mission” status, which assures funding under the government’s 5-year plan. Government funding for MIS is only likely to go up - MIS is a relatively low hanging fruit for the government in its effort to improve farmland productivity. The MIS market in India is at Rs. 2700 - Rs. 3000 cr, 3/4th of which is for drip irrigation which helps to save water & fertilizer. Agriculture consumes 80 % of water in the country & it makes sense to use drip & sprinkler irrigation systems. In February 9th M&M entered into micro irrigation sector by acquiring 38 % stake in 30 year old Nashik based company EPC for around Rs. 43 crore, M&M will give an open offer of additional 20 % stake in EPC on April 6th. 

Valuations and outlook

JISL has plans to raise Rs. 700 cr through QIP to repay its debt, to provide capital to its new NBFC and to support its future growth. Company believes that fund raising would happen in the next 3-4 months, depending upon the financial market conditions. I have not considered any equity dilution in my estimates. Company declared 1 bonus DVR SHARES (JISLDVREQ DVR shares ) on every 20  Equity Shares held. DVR with 10 % voting rights (click here for DVRs). I therefore recommend Buy and accumulate Jain Irrigation at every dip. My views are positive on the business of JISL and their future prospects on the back of untapped potential of MIS, agricultural business model and strong domestic presence. At present with the drip irrigation market is growing 40 % annually, stock is trading at 22.3x at FY12E EPS as against its historical one - year forward trading band of 10 x 32x. I recommend BUY on the stock with the target of Rs. 350.00

KEY FINANCIALS	2010	2011E	2012E	2013E
SALES (Rs. Cr's)	3,439.7	4,425.6	5,164.2	6,028.1
NET PROFIT (Rs. crs)	245.7	277.4	366.8	489.3
EPS (Rs.)	6.5	7.3	9.6	12.8
PE (x)	33.2	29.5	22.3	16.7
PRICE/BOOK (x)	6.6	5.5	4.5	3.6
EV/EBITDA (x)	16.8	13.6	11.5	9.5

I recommend BUY on the stock with the target of Rs. 350.00 for the long term.

For short term if one wants to play Budget -  Buy at Current Market Price with the target of Rs. 230, But please do keep a STRICT STOP LOSS OF 8 %. 

For LONG term investors BEST buy is at Rs. 180 - 195.