Sesa Goa - Operations come to a standstill - Centrum

Sesa Goa's iron ore operations came to a standstill during the end of Q2FY13E with Goa coming under the mining ban and MoEF suspending clearances for all mines in Goa. Topline tumbled by ~63% YoY to Rs2.9bn as iron ore volumes stood at a meagre 0.2 MT. Pig iron and coke volumes increased by 12% and 54% YoY and supported overall operations. EBITDA stood at ~Rs58mn with coke and pig iron businesses making up for losses from the iron ore division. PAT was reported at Rs5.2bn including profit from Cairn of Rs4.6bn but also included forex gain of ~Rs1.9bn. Adjusted PAT stood at Rs4bn. We remain cautious on the overall prospects of the company with Goa operations' quick restart visibility remaining low and Karnataka restart dependent on grant of various approvals on time. Recommend buy with a target price of Rs192 based on the SOTP valuation of the proposed Sesa Sterlite group.

- Volumes dip; Goa mining stops completely: Iron ore volumes stood at 0.2 MT as movement of ore from South Goa was restricted and operations were shut down from mid September. Realizations dropped to US$84/tonne due to the fall in spot prices.

- EBITDA at negligible levels: With iron ore operations coming to a standstill, EBITDA dropped to negligible levels. Coke and pig iron operations showed higher volumes and are expected to help recover fixed costs of iron ore business resulting in breakeven at EBITDA level going ahead.

- Conference call highlights: Goa operations remain closed and restart could depend on various factors including CEC recommendation and higher contribution of mining revenues to state exchequer. Karnataka operations can begin production with 2.29 mtpa capacity only after the Supreme Court allows restart of category-B mines and other approvals related to mining plan by MoEF and pollution board are received by the company. The company is hopeful of starting production and shipment in Goa and Karnataka before the end of Q3FY13E if all things fall in place but we remain skeptical on any volumes before Q4FY13E. The company is still in the process of completing its feasibility studies and drilling on the Liberia project (with resource base of 1bn tonne) and maintained its guidance of partial shipments by the end of FY14E. Pig iron and coke operations are expected to generate enough EBITDA to cover the fixed costs of iron ore operations.

- Earnings revised downwards on lower volumes: We revise our iron ore volume estimates lower for FY13E/14E with low visibility on volumes from Goa post shutdown and the need of various approvals and lease renewal required for restarting of Karnataka operations. We build in 0.4MT/2MT volumes from Karnataka operations and 5.8MT/10MT volumes from Goa in FY13E/14E. We have maintained our realization assumptions but revised our US$/INR assumption for FY13E/14E to 53/50. We revise our EBITDA estimates for FY13E/14E lower by 37%/23%.

- 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 buy with a target price of Rs192.

Source : Equity Bulls

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