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Sesa Goa Q3 FY12 results update by Nirmal Bang

Contributed by Nirmal Bang

By Nirmal Bang

Sesa Goa’s (SGL) 3QFY12 EBITDA was 31%/23% above our/consensus estimates, respectively, due to higher-than-expected realisation and iron ore volume. PAT was up 14%/7% veRs.us our/consensus estimates, respectively, a lower deviation veRs.us EBITDA, due to higher interest costs and forex loss. We have slightly tweaked our iron ore volume estimates by 2%/(1%) for FY12/FY13, while our realisation estimates have been increased by 14%/13%, respectively, in the same period due to higher proportion of Goa iron ore and stabilisation of iron ore prices. The above factoRs. led to a 11%/10% increase in FY12/FY13 EBITDA, while PAT estimates have been revised upwards by 3%/8%, respectively, for the same period. However, following uncertainty regarding Karnataka and Goa mining operations and likely cyclical downturn in iron ore prices, we retain our Sell rating on the stock with a revised TP of Rs.164 (up 12% from earlier TP of Rs.146), which is 18% below the CMP.

Stable volume, but mining uncertainty peRs.ists: SGL posted a 5% YoY growth in iron ore volume at 5.04mt, comprising 4.40mt and 0.64mt from Goa and Karnataka mines, respectively. However, it is left with only 0.10-0.15mt of ore inventory in Karnataka and as a result sales would grind to a halt in case resumption of mining operations is not allowed. Moreover, the Shah Committee is likely to submit its report on Goa iron ore mining post state elections i.e. after February 2012 and it may also propose an interim ban on all mining activities until illegal mines are seized. In our financials, we do not assume any mining ban in Goa and expect mining operations in Karnataka to resume by 2QFY13.

Blended realisation up driven by change in sales mix, weak rupee: SGL witnessed a 24% QoQ spurt in realisation at Rs.4,743/tonne (US$93/tonne) due to higher proportion of Goa iron ore sales and 11% rupee fall. Goa ore accounted for 87% of total volume during the quarter veRs.us 54% in 2QFY12.

Valuation: SGL is trading at P/E and EV/EBITDA multiples of 5.9x and 6.4x FY13E. We retain our Sell rating on it with a revised TP of Rs.164. Core business value increased from Rs.53 to Rs.66, while the value of Cairn India investment increased from Rs.93/share to Rs.98/share following a rise in Cairn share price.