Sesa Goa - Better-than-estimated EBITDA; upgrade to Buy - Avendus

Better-than-estimated EBITDA; upgrade to Buy

SESA's EBITDA for the quarter ended Mar12 was boosted by higher-than-projected realizations. Adjusted for the forex loss of INR1.6bn, EBITDA rose 7.7% q-o-q to INR11.5bn. We raise our revenue and EBITDA estimates for FY13f-FY14f up to 4% to account for better-thanforecasted realizations in 4QFY12. Net profit estimates have been raised up to 8.4% due to an increase in consensus estimates of Cairn India (CAIR IN, NR), an associate company. We raise our TP to INR235 based on SOTP, following a rollover to Mar13. The iron ore mining business is valued at INR129 based on an EV/EBITDA multiple of 3.5x and a 20% stake in CAIR is valued at INR106, which is at a 30% discount to its market price. We upgrade our rating to Buy after a correction in the stock price since Feb12.

Consolidated net sales increased 7.2% q-o-q to INR27.9bn

Consolidated net sales rose 7.2% q-o-q to INR27.9bn due to higher iron ore realizations. Iron ore realizations went up 5.4% q-o-q to INR4,910/tonne. Moreover, the iron ore sales volume increased 3.2% q-o-q to 5.2mn tonnes on a 13.6% growth in volumes from Goa operations. We estimate the sales volume in 1HFY13f to remain under pressure owing to the uncertainty on the revival of mining activities in Karnataka. We raise our FY13f–FY14f net sales estimates by up to 2% to account for better-than-estimated realizations in 4QFY12.

Adjusted EBITDA went up 7.7% q-o-q to INR11.5bn

The EBITDA adjusted for the forex loss of INR1.6bn, included in other expenditure, increased 7.7% q-o-q to INR11.5bn. The export duty outflow rose from INR4.5bn in 3QFY12 to INR7.4bn in 4QFY12 due to an increase in export duty to 30% since Jan12. Other expenditure went up 48.9% q-o-q to INR1.9bn. Higher iron ore realizations with no major increase in the input cost have led us to raise the FY13f-FY14f EBITDA estimates up to 4%.

Net profit (before associate share) rose 22.2% q-o-q

Net profit, excluding income from associates, increased 22.2% q-o-q to INR7bn, against our estimate of INR6.4bn. Cash and cash equivalents, as on Mar12, stood at INR5.9bn. Net profit, including income of INR4.7bn from associate CAIR, stood at INR11.6bn. The company has guided for a capital expenditure of INR6bn in FY13f and commissioning of a pig iron and coke oven capacity in 1QFY13f.

Raise net profit forecast for FY13f–FY14f; upgrade to Buy

We raise our EBITDA estimates for FY13f–FY14f up to 4% to account for better–than-projected realizations in 4QFY12. Net profit estimates for FY13f-FY14f was raised 8.4% due to a revision in consensus estimates for CAIR. We value SESA's mining business at INR129/share, applying an EV/EBITDA of 3.5x. We value the stake in CAIR at INR106/share, providing for a 30% holding company discount to its market price. We raise our TP to INR235 after a rollover to Mar13, and upgrade our rating to Buy, following a correction in stock since Feb12. Risks to our earnings are the weak iron ore prices and delay in the revival of mining activities in Karnataka.

Risk Factors

- A decline in international iron ore prices is likely to adversely impact profitability

- Lower-than-estimated volumes from Karnataka and Goa due to delay in lifting the mining ban, and infrastructure bottlenecks.

Source : Equity Bulls

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