By Angel Broking

Sesa Goa’s 1QFY2011 results were in line with our estimates at the top line. Bottom line was ahead of our estimates because of lower tax rate at 17.8% versus our estimate of 23%.

Lower iron ore volume growth, compensated by higher prices: Sesa Goa’s top line increased by 138.6% yoy to Rs2,413cr. The company’s iron ore sales volume increased by only 14.9% yoy to 5.4mn tonnes and average realisations increased by 146.1% yoy to US $91/tonne. Iron ore sales volume was negatively affected by forest permit issues in Karnataka and logistics constraints in Orissa. Pig iron volumes decreased by 23.9% yoy to 54,000 tonnes due to lower demand from foundaries. However, realisations increased by 35.6% yoy to Rs25,328/tonne. Despite being negatively affected by a) higher export duty, b) increased royalty rates and c) increased freight rates, EBITDA margin expanded by 1,569bp yoy to 60.5%. Strong operational performance, coupled with higher other income (which increased by 114.2% yoy to Rs161cr), led to 208.3% yoy growth in net income to Rs1,302cr.

Outlook and Valuation: Sesa Goa is currently trading at 3.7x and 2.9x FY2011E and FY2012E EV/EBITDA, respectively. With iron ore prices falling by 31.5% over the past three months, possibility of export duty being increased and management’s guidance of 20–25% volume growth at risk due to delay in forest and environmental clearance and infrastructure bottlenecks in Orissa, we maintain our Neutral view on the stock.

Top line boosted by price increase, volume increase marginal

Sesa Goa’s top line increased by 138.6% yoy to Rs2,413cr. Iron ore sales volumes increased only by 14.9% yoy to 5.4mn tonnes. While Goa accounted for 3.0mn tonnes of iron ore sales, Karnataka and Orissa accounted for 0.54mn tonnes and 0.64mn tonnes, respectively. Further, the acquisition of Dempo contributed 1.2mn tonnes to iron ore sales during the quarter.

Iron ore sales volumes were negatively affected by forest permit issues in Karnataka and logistics constraints in Orissa. Average realisations increased by 146.1% yoy and 36.8% qoq to US $91/tonne during the quarter.

Pig iron volumes decreased by 23.9% yoy to 54,000 tonnes due to lower demand from foundaries during the quarter. However, realisations increased by 35.6% yoy to Rs25,328/tonne.

EBITDA margins expand leading to robust bottom-line growth

Despite being negatively affected by higher export duty, increased royalty rates and increased railway freight rates, EBITDA margin expanded by 1,569bp yoy to60.5% during the quarter. Strong operational performance, coupled with higher other income (which increased by 114.2% yoy to Rs161cr), led to 208.3% yoy growth in net income to Rs1,302cr.

Outlook

Increasing iron ore production in China

For the first five months of CY2010, China produced 269mn tonnes of crude steel production, which is 47.6% of its past year’s production of 566mn tonnes. In May 2010, Chinese crude steel production stood at 56mn tonnes, higher by 20.8% yoy. The continuous increase in crude steel production led to spot iron ore prices increasing by ~3x. With iron ore prices trading above US $100/tonne, many highcost iron ore mines in China started operations, thus leading to a surge in iron ore production. In May 2010, Chinese iron ore production grewby 38.9% yoy to 91mn tonnes, while it was up 30.6% yoy for January–May 2010.

leading to reduced demand for imported ore

Increased domestic iron ore production has reduced China’s dependence on imported iron ore. In April and May 2010, Chinese iron ore imports declined by 2.9% yoy. Consequently, iron ore prices corrected by 31.5% post April 2010.

Valuation

Sesa Goa is currently trading at 3.7x FY2012E and 2.9x FY2011E EV/EBITDA. On a P/BV basis, the stock is trading at 2.4x FY2011E and 1.8x FY2012E estimates. With iron ore prices falling by 31.5% over the past three months, the possibility of export duty being increased and management’s guidance of 20–25% volume growth at risk due to delay in forest and environmental clearance and infrastructure bottlenecks in Orissa, we maintain our Neutral view on the stock.