Sesa Goa - All eyes on restart of Karnataka operations - Centrum

Sesa Goa's iron ore operations continued to remain closed during Q1Y14E and as a result the company suffered EBITDA loss of ~Rs428mn which was lower QoQ on account of higher volumes from value addition business of pig iron and coke. Pig iron and coke sales volumes saw impressive YoY increase of 180% and 57% respectively, but lower margins due to depressed pricing prevented overall fixed costs to recover completely. PAT was reported at Rs4.1bn including profit from Cairn of Rs6.2bn and forex loss of ~Rs992mn. Restart of Karnataka operations is keenly watched out for, but we remain cautious on the overall prospects of the company with Goa operations' restart visibility remaining low and Karnataka restart dependent on grant of various approvals on time. We recommend Buy with a target price of Rs157 based on the SOTP valuation of the proposed Sesa Sterlite group.

Iron ore division remains closed: Iron ore operations remained closed in both Goa and Karnataka while pig iron and coke divisions delivered sales volumes of 126579 tonne and 83316 tonne, up by 181% YoY and 57% YoY respectively. Market conditions remained tough for the pig iron division with shortage of iron ore and low end user demand from domestic market which kept pig iron prices under pressure.

EBITDA remains in red: With iron ore operations remaining shut, EBITDA continued to be in the negative zone with loss of Rs428mn. Coke and pig iron operations showed higher production volumes but tough market conditions and lower pig iron prices resulted in pressure on margins and the company could not recover the fixed costs of iron ore business completely.

Conference call highlights: Goa operations remain closed and restart could depend on various factors including CEC recommendation and Supreme Court (SC) hearings on the matter which has not happened till now. Inventory sales of already mined ore could be allowed by SC and Sesa holds ~3.5 MT of inventory in Goa. Karnataka operations' restart has been delayed due to non-receipt of forest clearance. Liberia expansion has seen capex escalation to US$230mn for phase 1 of 2mtpa and FOB cost guidance has been increased to US$60/t (from ~US$40/t earlier). Shipments are expected to start by Mar'14 with exit capacity of 2mtpa achieved by Dec'14. Payment of stamp duty for Goa operations continue and company paid Rs400mn for the same in Q1. Gross debt stood at ~Rs48bn.

Earnings revised downwards on lower volumes: We revise our iron ore volume estimates lower for FY14E with low visibility on volumes from Goa post delay in start of hearing from Supreme Court in Goa. We expect Karnataka operations to start by Q3FY14E after receiving MoEF forest clearances. We continue to build in 2.29MT volumes from Karnataka operations and expect 1MT inventory sales volumes from Goa in FY14E. We have revised our EBITDA estimates for FY14E lower by 66%.

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 soon). We recommend Buy with a target price of Rs157.

Source : Equity Bulls

Keywords