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Consolidated Q4FY09 Result Analysis - Sesa Goa Ltd.

Keynote Capitals presents consolidated Q4FY09 result analysis of Sesa Goa Ltd., India's largest exporter of iron ore in the private sector.

Sesa Goa Limited (SGL) is India's largest exporter of iron ore in the private sector. For the past five decades, the group has been involved in iron ore mining beneficiation and exports, with a group turnover of around Rs180bn. Over the last decade, it has diversified into the manufacture of pig iron and metallurgical coke. The group operates a 280,000 tpa metallurgical coke plant and a 250,000 tpa pig iron plant. It has mining operations in Goa, Karnataka and Orissa.

Highlights

- Net sales decreased 15.3% y-o-y due to a 17.2% fall in iron ore realizations y-o-y; volumes marginally up.

- EBITDA margin down 18.1% y-o-y on higher freight cost (up 27.9%) and other expenses (up 245.7%):

- Pig iron and Met coke business segments to remain subdued

- Cash is king: but no acquisition plans in the near term

Highlights of Quarterly Results (RsCr)

Net sales decreased 15.3% y-o-y due to a 17.2% fall in iron ore realizations

SGL's net sales in Q4FY09 stood at Rs14.43bn as iron ore realizations fell from Rs3082 to Rs2552 per tonne and volumes were flatfish or marginally up 0.4% (y-o-y) at 5.025mn tonnes. Spot sales was a high 80% of total sales, as buyers remained circumspect for entering into long term contracts due to the slump in global steel demand.

World crude steel production was up 5.3% and down 3.0% for the months of January and February 2009 respectively m-o-m. SGL expects volume growth in the range of 20-25% for FY10. The weakening of the Rupee (NR) vis-a-vis the USD partially reduced the impact of the plunge in iron prices. Price negotiations are going on and iron ore prices for 63% grade are expected to fall at least by 35-40%. China will continue its dominance in determining prices. Hence, we expect SGL's realizations to go south, going forward.

World-wide crude steel production (mn tonnes)

China: reducing iron ore imports from India

Iron ore: Chinese imports vis-a-vis Chinese import prices from India

China Import Indian Iron Ore 63% Fe (CFR China) $/tonne

EBITDA margin down 18.1% y-o-y on higher freight cost (up 27.9%) and other expenses (up 245.7%)

SGL registered a tall in EBITDA margin from 70.3% to 52.2% y-o-y, on account ot increase in blended cost per tonne by 34.6% to Rs1394. Increase in freight costs as % of sales by 4.7% and other expenditure as % of sales by 7.2% were the major drags. The increase in other expenditure is attributable to the hedging loss (SGL's aggregate hedging loss is about Rs223Cr for FY09.) Freight cost per tonne increased by 27.9% to Rs201.49Cr. Ore purchases cost per tonne increased by 50.6% to Rs191.68Cr.

On q-o-q basis, margins increased by 11% as blended cost per tonne fell by 6% and iron ore realization increased by 11.2%. Freight cost per tonne dipped by 11% as SGL minimized its output from the Orissa mine. Export duty as % of sales fell by 8.1%. SGL wrote back export tax as it expects a favorable outcome of its dispute with the authorities. The depressed realizations in case of pig iron and Met coke and increase in purchase of ore costs and other expenditure by 4.3pps and 2.2pps respectively restricted the EBITDA margin expansion.

Key Statistics - Iron Ore

Contribution form Iron ore as % of total sales remained flat y-o-y while on q-o-q it reduced by 2.7pps to 88.8%.

Rising iron ore inventory levels - will it resume price correction?

China: reducing iron ore imports from India

Pig iron and Met coke business segments to remain subdued

The consolidated realization/tonne for pig iron stood at Rs18,738 per tonne down 26.6% (q-o-q) and by 13.2% (y-o-y) contributing 9.2% of total revenues. The consolidated realization/ tonne for Met coke stood at Rs13,941 down 38.7% (q-o-q) and by 7.8% (y-o-y) contributing 2.0% of total revenues. SGL has resumed production after the reduction in inventory in Q3FY09. We expect performance of both divisions to remain subdued until fresh demand arises. SGL expects to sell 271,000 tonnes of pig iron and 250,000 tonnes of Coke in FY10.

Key Statistics

Pig Iron

Pig iron's contribution as % of total sales marginally increased by 0.5bps y-o-y and 2.5pps q-o-q to 9.2%.

Met Coke
Met coke's contribution as % of total sales remains flatfish. It degrew by 0.8bps y-o-y but increased by 0.2bps q-o-q to 2.0%.

Cost break-up

Cash is king: but no acquisition plans in the near term

SGL has about Rs41.4bn in cash on its books. It has disbursed about Rs10bn to its group company Vedanta and has no plans to disburse more. The balance is invested in liquid mutual funds.

It has capex plans including certain investments in infrastructure to the tune of Rs2.5-3bn during FY10. The acquisition plans are currently on the backseat during these turbulent times. It has declared a dividend of Rs2.25 per share aggregating to outflow of Rs1.77bn. There has been a gross addition of 54mn tonnes to reserves through successful brownfield exploration and drilling.

Valuation

The stock trades at 2.6x FY09 EPS of Rs25.26.

Yearly Financial Highlights (RsCr)

Shareholding Pattern as on 31st March 2009

Relative Stock performance