Sesa Goa Ltd - PINC Result Review

Short term concerns; Attractive valuations

Sesa's Q1FY11 consolidated revenues increased 139% YoY to Rs24.1bn, driven by higher realisations (up 130% YoY to USD91/tonne) and enhanced sales volumes (15% YoY to 5.4mn tonnes). Consequently, EBITDA grew 242% YoY to Rs15.5bn and adjusted profit surged 230% YoY to Rs13.9bn.

OUTLOOK

Although iron ore spot price (63.5% Fe, CFR China) is up 36% YoY, the prices have corrected by >30% since their recent peak in April, due to lower imports from China. We believe that the spot prices would decline further on concerns of consolidation in the steel industry in China. Consequently, we expect Q3FY11 contract prices to decline QoQ. We have assumed average iron ore realization/tonne (FOB price for 63.5% grade) of USD100 and USD80 for FY11E and FY12E respectively.

VALUATIONS AND RECOMMENDATION

Although, correction in spot prices and probable hike in export duty could dampen Sesa's profitability in the near term, fundamentally we are positive on the stock given 20-25% volume growth, strong balance sheet and likely deployment of excess cash in value-accretive projects. At 3.2x FY12E EV/EBITDA, the stock is attractively valued. We recommend a 'BUY' on the stock with a DCF-based target price of Rs396.

Source : Equity Bulls

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