27 January 2012
3QFY12 Results Update | Sector: Metals
Sesa Goa
BSE SENSEX
S&P CNX
17,077
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,158
SESA IN
869.1
335/149
15/-21/-29
174.3
3.5
CMP: INR200
TP: INR203
Neutral
Consolidated
Sesa Goa's (SESA) adjusted consolidated PAT for 3QFY12 declined 24% YoY to INR8.1b, below our estimate of
INR10.4b due to consolidation of Cairn India's profit for only 24 days.
Reported PAT (after minority interest and profit from associates) of INR6.9b was impacted by INR1.8b of forex
loss on FCCBs and ECBs of USD400m.
Core PBT (before extraordinary items) was INR10b, higher than our estimate of INR7.8b due to higher iron ore
volumes and higher than expected realizations.
The restart of iron ore mining in Karnataka is likely to be delayed further, as the Supreme Court (SC) hearing
is now scheduled for February. Only 150kdmt of iron ore inventory is available for sale in 4QFY12.
The Shah Commission Report is further delayed by three months due to state elections.
Export duty on iron ore has been hiked from 20% to 30%. Though the industry has made representations
against it, no decision is likely before the budget.
Expansion of pig iron capacity by 375ktpa is delayed by three months. The management believes that full
production can be achieved in FY13; which we believe is contingent upon restart of mining in Karanataka.
Though consolidated EPS would decline just 0.5% YoY to INR33.9 in FY13, core earnings are likely to nearly
halve due to increase in export duty from 20% to 30% and 14% decline in ore realization. We have factored full
5.2mdmt ore volumes from Karnataka mines, which is contingent upon the restart of iron ore mining in Goa.
Net debt stands at INR39.3b as at the end of the quarter. The stock is trading at 5.9x FY13E EPS and 1x FY13E BV.
Maintain
Neutral
with a target price of INR203.
Sanjay Jain
(SanjayJain@MotilalOswal.com);Tel:+9122 39825412/
Pavas Pethia
(Pavas.Pethia@MotilalOswal.com); +9122 39825413

Sesa Goa
Iron ore volumes and realization surprised positively
Iron ore volumes increased 5.5% YoY to 5.04m dmt due to higher volumes from
Goa despite logistic challenges. Volumes from Karnataka mines increased 1.5%YoY
at 640kdmt. Volumes from Goa mines increased 18% YoY to 4.4m dmt.
Average realization was higher than expectation at USD94/dmt. Although
realization from Karnataka mines declined USD9 QoQ to USD31/dmt, the realization
of Goa mines declined only USD20 QoQ to USD103/dmt despite correction of
USD40/dmt QoQ in average spot prices to USD148/dmt cfr China. This is definitely
a creditable smart selling. Sesa has gained from cfr freighting and benefit of lagged
quarter pricing in this quarter. This may affect the realization in 4QFY12.
Indian 63.5% grade iron ore fines in China (USD/t)
CIF
200
160
120
80
40
FOB
Source: Bloomberg/Company/MOSL
27 January 2012
2

Sesa Goa
EBITDA declined 12% YoY to INR10.8b due to lower margins
EBITDA declined 12% YoY to INR10.8b as margins of iron ore segment declined due
to higher costs.
Iron ore EBIT declined 8% YoY to INR 10.6b. Coke segment turned in losses. Pig
iron EBIT declined 48% YoY to INR181m.
The cost of iron ore was USD52/dmt and margins were USD42/dmt.
Outlook and Valuation
Although consolidated EPS will decline only 0.5% YoY to INR33.9 in FY13, the core
earnings are likely to near halve due to increase in export duty from 20% to 30%
and 14% decline in iron ore realization. We have factored full 5.2m dmt iron ore
volumes from Karnataka mines, which remain contingent upon restart of iron ore
mining in Goa.
The stock is trading at FY13 PE of 5.9x and P/BV of 1x. Maintain
Neutral
with target
price of INR203.
Target price calculations
FY13
Core business
EBITDA
Core multiple (x)
Target EV (core business)
Net Cash
Target Mkt Cap (core)
A. Target price per share (core)
Cairn India stake
No. of shares (m)
Cairn TP
value at TP
Holding company discount
Value after discount
B. Value per share
Target Price (a+b)
20,903
5.0
104,516
-20,546
83,970
97
384
320
122,828
25%
92,121
106
203
Source: Company/MOSL
27 January 2012
3

Sesa Goa
Sesa Goa: an investment profile
Company description
Sesa Goa (SESA) has iron-ore reserves and resources of
306mt 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.
Key investment arguments
SESA aims to grow inorganically and organically.
The cost of mining and transport is significantly
lower in Goa than in Karnataka and Orissa.
SESA has a strong focus on increasing reserves over
2-3 years from the existing 306mt.
Indian miners are at an advantage over Brazilian
miners due to their proximity to China, the largest
customer.
with its subsidiary, Sesa Resources Limited hold 20%
of the share capital of Cairn India Limited.
Valuation and view
Stock is trading at FY13 PE of 5.9x and P/BV of 1x.
Maintain
Neutral
with target price of INR203
Sector view
Oligopoly of Vale, BHP-Billiton and Rio Tinto is
getting firmer grip over iron ore market because
exports from fragmented Indian market have
dwindled due to various regulatory and fiscal
measures. China is increasingly sourcing more
expensive iron ore from other countries to make up
for lost supplies from India. Iron ore prices after
plunging to USD120 are now trading firm at
USD146per ton cfr China for 63% and are expected to
hold for some time amid temporary supply concerns.
Some supply growth from Australian junior mines
has suffered a setback due to slower-than-expected
progress on new open access Oakarjee Port & Rail
(OPR) project in mid-west Australia.
Currently iron-ore market is critically balanced and
investments across the world in new assets will drive
iron-ore supply by 730mt over the next five years.
High iron-ore prices are not sustainable for long term
because there is no shortage of iron-ore reserves in
world.
Key investment risks
Unexpected softening of spot prices of iron ore, led
by a slowdown in steel demand will adversely impact
earnings.
Sesa and its subsidiary Sesa Resources Limited
acquired approximately 1.5% of the total paid up
share capital of Cairn India from Cairn UK Holdings
Limited. With this acquisition Sesa Goa Limited along
Recent developments
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Sesa Goa
5.9
5.9
1.1
1.0
2.3
2.2
5.5
9.3
NMDC
10.1
10.8
2.9
2.4
4.6
4.4
5.9
6.3
Jindal Steel
12.2
10.8
2.8
2.3
3.8
3.5
9.4
8.8
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
34.1
33.9
Consensus
Forecast
34.4
38.5
Variation
(%)
-0.9
-11.8
FY12
FY13
Target Price and Recommendation
Current
Price (INR)
200
Target
Price (INR)
203
Upside
(%)
1.5
Reco.
Neutral
Stock performance (1 year)
Shareholding pattern (%)
Dec-11
Promoter
Domestic Inst
Foreign
Others
27 January 2012
55.1
5.2
24.9
14.7
Sep-11
55.1
5.2
24.1
15.7
Dec-10
55.7
4.5
24.6
15.2
4

Sesa Goa
Financials and Valuation
27 January 2012
5

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