Sesa Goa - Buy - Event Update - Export duty hike - Centrum

Sesa Goa
Buy
Target Price: Rs195
CMP: Rs166
Upside: 18%

Export duty hike compounds woes

Sesa Goa was dealt another blow by regulatory authorities recently with a hike in export duty on iron ore to 30% from 20%. This has come as a negative surprise compounding the woes of Sesa struggling from the mining ban in Karnataka and increasing cost of operations. We cut earnings estimate to account for higher costs and a further drop in both volumes and realizations. Maintain Buy on account of attractive valuations with major contribution from Sesa's investment in Cairn India Ltd.

- Export duty hiked to 30%: Export duty hike of a further 10% is expected to result in total export duty outgo of Rs14.7bn in FY13E (up 36%) and Rs14.2bn in FY14E (up 32%) putting volumes of high cost lumps and lower grade ore under pressure.

- Volumes to remain under pressure: With the hike in export duty, we see volumes of lumps and very low grade ore from Goa becoming unviable and hence expect a drop in volumes going forward. We have factored in volumes of 15MT/17MT on DMT basis in FY13E/14E.

- Realizations muted but rupee depreciation helps: Global iron ore prices have remained volatile and formed a benchmark base at US$135-140/tonne CFR which is 25% lower than their CY11 highs. Sesa's realizations have remained muted on account of this, but steep rupee depreciation has helped cushion the fall.

- Margins to slide going forward: We expect Sesa's margins to slide to 36.9%/35% in FY13E/14E on account of subdued realizations, lower volumes from Goa and increase in costs post export duty hike.

- Mixed news flow expected going ahead: We see mixed news flows related to the company going ahead with the possibility of mining ban in some areas in Goa post the Shah Commission report submission. Implementation of mining bill can further increase mining cost but possible removal of mining ban from Karnataka post Supreme Court's hearing on 20 Jan 2012 could result in increase in overall volumes.

- Cairn stake hiked to 20%: Sesa hiked its stake in Cairn India Ltd to 20% from 18.5%, qualifying it as an associate of the company and allowing profits of Cairn to get consolidated in the group PAT of Sesa going forward. We see attributable PAT contribution of Rs17.2bn in FY13E to Sesa from Cairn.

- Valuations – Maintain Buy: At the CMP of Rs166, the stock trades at 0.8x FY13E book value of Rs198.4. We have valued the stock on SOTP basis and the company's core iron ore and pig iron business at 3xFY14E EV/EBITDA (discount of ~30% to global average of 4.5x). We revise our target price to Rs195 and maintain Buy on attractive valuations.

Source : Equity Bulls

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