Sesa Goa - Q4FY12 Result update/Estimate change/Rating change - Centrum

Sesa goa (Sesa) reported better-than-expected Q4FY12 results with net sales of Rs27.9bn, up by 6.8% QoQ on the back of 5% higher QoQ realizations and 3% QoQ increase in iron ore volumes to 5.2 MT. EBITDA was subdued despite higher realizations and stood at ~Rs10bn with margin at 35.7due to increase in transportation costs and higher export duty. PAT was reported at Rs11.6bn including profit from Cairn of Rs4.6bn but also included forex gain of ~Rs2.3bn and exceptional loss of ~Rs0.7bn. Adjusted PAT stood at Rs10.5bn. Sesa expects ~15 MT of iron ore sales in FY13E from Goa operations. We remain cautious on the overall prospects of the company and have also factored in a 50% increase in royalty from FY14E (against proposed 100% increase in mining bill). Recommend hold based on the SOTP valuation of the proposed Sesa Sterlite group.

Realizations surprise positively: Iron ore volumes stood at 5.2 MT (our expectation 5.1 MT) but realizations surprised positively and came at US$99/tonne as Sesa was able to realize previous higher price on long term contract quantities and spot prices improved sequentially. The company expects pricing to remain close to spot basis going forward.

Margin dips: EBITDA fell by ~8% QoQ to Rs9.96bn despite higher volumes and realizations on the back of increased costs and higher export duty. EBITDA margin stood at 35.7% due to consistent cost pressures. Transportation cost in Goa went up in the wake of resistance from the transporters in South Goa.

Conference call highlights: Sesa added ~68 MT of reserves and resources to its reserve base with majority of reserve addition from Goa. Volumes for FY13E are expected to be ~15 MT from Goa including inventory sales and cost of production remains ~US$25/tonne in Goa (including royalty). Karnataka operations can begin production after getting the relief and rehabilitation plan approved and implemented and obtaining environmental clearance from the MoEF. Capex for FY13E to be ~Rs6bn. Company is still in the process of completing its scoping study on Liberia project (with resource base of 1bn tonne) and made no capex guidance for the same.

Earnings revised downwards on lower volumes and expected royalty increase: We revise our earnings estimate for FY14E as we factor in ~50% increase (against proposed 100% increase in mining bill) in royalty on iron ore from FY14E. We revise our iron ore volume estimates lower for FY13E/14E with very little clarity on restarting of Karnataka operations as Sesa's mines are under B-category and would have to implement the R&R plan and get approvals from MoEF before restarting operations. We build in 1MT/2MT volumes from Karnataka operations in FY13E/14E. We have revised our iron ore realizations assumptions upwards to factor in positive spot price movements and better realizations of Sesa during the past few quarters.

Valuations: We continue to value the stock on the basis of our SOTP valuation for the proposed group entity Sesa Sterlite (which is expected to be in place before CY12E end). We recommend hold with a target price of Rs208.

Source : Equity Bulls

Keywords