Maintain Buy on Sesa Goa - Motilal

SESA GOA: Weight and time limits on trucks affecting Goa shipments; Iron ore price up further; Maintain Buy

Sesa Goa iron ore shipments are under constant pressure while iron ore export prices continue to surprise positively.

Volumes have been downgraded number of times in last 6 months. Expectation on volume growth has been toned down from 20-25% to flat volumes for FY11.

Recently, state agencies in Goa have come down heavily in enforcing weight and time limit. Truckers lost heavily on revenues and raised road freight by 100%.

Weight and time restriction continue to pose downward risk to our volume estimates. Management may further revise volume guidance downwards.

However, the continued upward move of iron ore prices (up $5/ton to US$180/ton) and downward pressure on sea freight is likely to present positive surprises in realizations. Goa road freight hike will increase cost by US$2-3/ton. Sesa trades at an attractive FY12 EV/EBITDA of 2.9x. DCF based SOTP works out Rs458 assuming long term iron ore prices at US$120/dmt fob for 63% Fe vs current prices of nearly US$165/dmt for same grade of ore. Maintain Buy.

Source : Equity Bulls

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