Buy Sesa Goa - Motilal Oswal

• Mkt Cap USD6.2b
• CMP Rs352
• Buy

- Adjusted PAT increased 3.3x YoY to Rs13.8b v/s our estimate of Rs11.4b. Reported PAT of Rs13b included forex loss of Rs911m on FCCB. PAT was higher than estimated despite lower than expected volumes due to lower tax rate, higher other income and higher iron ore realization.

- Realization for iron ore was US$92/ton v/s our estimate of US$84/ton. Sesa has started selling more on CFR basis to get better FOB realization. Iron ore shipments grew 15% YoY to 5.4m tons (v/s our estimate of 5.8m tons) largely due to consolidation of volumes from Dempo. Excluding Dempo, sales volumes actually declined 11% YoY to 4.2m tons due to temporary logistic bottlenecks.

- Production was robust at 6.4m tons. Certain delays pertaining to forest permits in Karnataka, logistics issue in Orissa, and strict norms of moisture content in ore shipments from Goa during monsoon constrained volume growth.

- Sesa remains committed to ramping up production to 50m tons in 2-3 years. It has taken various initiatives to invest in logistics infrastructure, and has applied for various statutory permissions. However, it is facing challenges in getting new permits especially from MoEF, which may delay volume expansions.

Valuations remain attractive; maintain Buy: Iron ore shipments should pick up in the second half due to more favorable weather. For FY11, we estimate total iron ore volumes of 25m-26m tons. We are lowering our ore price realization from US$140-150/dmt on CFR basis for 63.5% grade to US$125-135/dmt for rest of FY11. Freights have declined significantly. We are cutting sea freight from US$30/ton to US$20-25/ton. Also, we are lowering tax rate from 26.8% to 19.5%. Our EPS estimate for FY11 remains unchanged though our EBITDA estimate has come down from Rs66.3b to Rs59.3b. Sesa has a strong balance sheet, with liquid cash of Rs80.5b. The stock trades at an attractive 5.7x FY11E EPS and an EV of 3.5x FY11E EBITDA. Maintain Buy.

Source : Equity Bulls

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