Sesa Goa - Limited upsides; Hold - Anand Rathi

Sesa Goa reported disappointing results from core operations in 2QFY13, led by low iron ore sales. However, its adj. PAT grew 42.1% yoy due to income from share of profit in associate company. We retain Hold as rerating of the merged entity, Sesa Sterlite, is constrained by access to cheaper raw materials and visibility on projects.

Iron ore business at its lowest. Revenues declined 62.7% yoy to Rs.2.9bn due to lower iron ore sales (down 87% yoy to 0.2mt) led by ban on mining in Goa. Iron ore iron ore realization was flat yoy at US$85/tn.

Fixed costs, exceptional items dent earnings. EBITDA declined 97.7% yoy to Rs.0.6bn, mainly due to volume dip and higher fixed costs. The company reported an exceptional item related to forex gain and VRS of Rs.1.9bn. Share of associate income from Cairn India was Rs.4.6bn, leading to PAT of Rs.5.2bn against Rs.13m in 2QFY12.

Associate income to boost reported earnings. Iron ore sales volumes from Goa will be hit drastically in FY13e, following recent ban on mining by the Supreme Court and Ministry of Environment and Forests(MOEF). Hence, core business profits could nosedive in FY13e. This impact could, however, be offset by income from Cairn India, aiding earnings growth.

Valuations. Sesa Goa is trading at 2.7x FY14e EV/EBITDA. Risks. Raw material project approvals earlier than expected and stronger realisations.

Source : Equity Bulls

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