Sesa Goa - All eyes on Karnataka - ElaraCapital

EBITDA loss continues on absence of iron-ore sales

During 4QFY13, Sesa reported EBITDA loss of INR959mn as it virtually could not sell any iron ore due to continued restriction on iron ore extraction in Goa and Karnataka. This coupled with losses from pig iron due to lower realization and higher iron ore cost contributed to this operating loss. Higher depreciation (due to payment of stamp duty for renewing mining leases for last five years) and higher interest cost (due to interest payment on commercial rates amid export ban) further aggravated losses at net level. Its share of profits from Cairn India helped it to record net profit of INR2.8bn (down 75% YoY).

Outlook and valuation

Sesa now awaits statutory clearances including forest clearance to resume mining in Karnataka. It can easily sell 2.2mn tonnes from Karnataka in FY14 even if it receives all the clearances by 1HFY14-end. The situation in Goa remains the same. The date for initial hearing is yet to be fixed by the Supreme Court. Hence, we do not expect any final outcome to come at least in this quarter. Sesa used to sell 70-75% of its iron ore in 2H from Goa. Hence, even if the mining ban is lifted by 1HFY14, it can manage to sell ~10mn tonnes in FY14 from Goa, provided the Supreme Court does not put a much lower cap on the yearly sales volumes as it did in Karnataka. Hence, assuming that the mining ban may be lifted by 1HFY14, we maintain FY14 sales volume assumption of 12.2mn tonnes. Though we have assumed iron ore sales to revert to normal in 2HFY14, it is quite possible the legal procedures may take longer than anticipate to complete. We have not incorporated any volumes from Liberia for FY14, though the company continues to guide first shipment from 4QFY14.

We feel that we could hear positive news from here on and the current price factors in the mining ban too. Iron ore segment constitutes ~15% of the value of the new entity, Sesa Sterlite. So, the value of the company depends more on zinc and oil segment. We maintain Accumulate with our SoTP based Target price of INR168.

Source : Equity Bulls

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