Maintain Buy on Sesa Goa - Motilal Oswal

SESA GOA 2QFY11: Below estimate; PAT grew 110% YoY to Rs3.5b; Higher than expected costs; Realization disappoints

- Sesa Goa 2QFY11 Adj PAT increased 110% YoY to Rs3.5b(estimate of Rs4.8b), driven by higher than expected cost and lower than expected realization.

- Net Sales increased 70% YoY to Rs9.2b. However, realization declined 16% QoQ as spot iron ore prices were on a downward trend till mid July.

- EBITDA almost doubled YoY to Rs3.03b, (estimate of Rs5.23b). 2QFY11 was anyways a seasonally quarter; we had modeled 8% of FY11 EBITDA in 2QFY11.

- Unallocated Capital as of 30th September, 2010 is Rs84.7b, which will be utilized to acquire 20% stake in Cairn India. Cash & equivalents stand at Rs76b.

- Though Sesa's realization has been disappointing in this quarter, perhaps due to higher discount for lower grades and / or deteriorating grade as company is trying to ramp up volumes, we expect realization to move up in 2HFY11 due to firming of iron ore prices in spot market. Sesa sells nearly 60-70% volumes in second half due to seasonal factors.

Stock trades at a FY11 PE of 6.5x, FY12 PE of 5.8x, FY11 EV/EBITDA of 3.7x and FY12 EV/EBITDA of 2.3x with out modeling Cairn acquisition. Cairn acquisition is EPS accretive by 15-16%. Proposed mining tax, still under discussion, may erode bottom line depending upon final outcome of Mining Bill. Maintain Buy.

Source : Equity Bulls

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