Bhavesh Chauhan of Angel Broking is marginally positive on Sesa Goa after Supreme Court's (SC) decision to lift mining ban in Karnataka as the ban in Goa still persists.
The SC on Thursday also stalled Vedanta Group’s bauxite mining project in Niyamgiri Hills of Odisha till gram sabhas of districts Rayagada and Kalahandi in the State give clearance to it.
"It is a sort of non-event for us because we already expected that and believe that is what street was expecting.," Chauhan says.
Chauhan remains positive on Sesa Goa and Sterlite based on sum-of-the-part (SOTP) Analysis valuations. "We do not foresee any further decline in iron ore price for NMDC. Even the stock has bottomed out, so (it is) a good level to enter into (the stock)," he told CNBC-TV18.
Below is the verbatim transcript of Bhavesh Chauhan’s interview on CNBC-TV18
Q: It seems to be a big relief even for Sesa Goa. What is your view on the stock? How much relief could this provide to the stock and to the earnings?
A: For Sesa Goa, it is marginally positive because its main operations are in Goa where there is a mining ban and there is no clarity as to when they will start. 2.3 million tonne of capacity will come from Karnataka and also that will take time. Maybe it will take next six-eight months to commence the production of 2.3 million tonne on an annualised basis, so that will not be a big relief for Sesa Goa.
As far as stock is concerned, we value it on a merged entity basis where we assume Sesa Goa and Sterlite are merged together. In the merger, Sesa Goa’s contribution is only 10 percent to the sum of the parts (SOTP) valuation. In that context, this is even smaller. You can also call it a neutral for Sesa Goa.
Q: How would you approach Sterlite because the ban on the Niyamgiri mining will continue?
A: It is a sort of non-event for us because we already expected that and believe that is what street was expecting. Had it come positive, we would have said that it is big positive and there would have been a big relief to Sterlite and stock would have reacted but now that there is nothing that has come up, it is like a non event.
Q: The fact that category C mines cannot be mined but category B mining has been opened, net-net what is the advantage to the company?
A: Category B mines, this was also more or less expected. The only thing is that now we need to see how reclamation and rehabilitation (R&R) is being taken care of by the companies because in A category we have seen that it took up a lot more time. A category mines, the permission was received in September. Out of 18 mines, only 9 mines are operational as of now. After six months only, half the mines have complied with R&R. If this precedent is to be believed for B mines also, it could take a little longer for B mines to come up five-six million tonne which everybody is saying.
In three-six month, we could have a scenario where after six months only there are half the mines operating. So, annual capacity of close to three million tonne just comes on stream. Although this is a positive, if you consider the fiscal year 15, as of now, in FY14, we should not think this as a big positive for JSW Steel or even for Sesa Goa.
Q: Would you recommend JSW , Sesa Goa, Sterlite at current levels at all? Do you think most of it is priced in?
A: We are positive on Sesa Goa and Sterlite. Based on SOTP valuations, we see upsides in Sesa Goa and Sterlite. On JSW Steel, we remain neutral because more or less this news was factored. We were expecting category B mines to gradually start in FY14 and that is what it looks like. On valuation front, it is trading close to four times enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) FY14 and therefore, we are neutral on the stock.
Q: What’s the call on Sterlite in terms of the impact of not being able to mine at Niyamgiri? What will it shave off by way of earnings per share (EPS)?
A: We were not factoring in Niyamgiri mine itself. This is kind of a non-event so there is no impact on EPS as such.
Q: What kind of volumes do you think Sesa Goa can do this year at all since the category B mines even if the permission has been given, will take some time to start operations? Volume wise, what can Sesa Goa do at all?
A: This is a challenging question because we don’t know when the mining will commence in Goa. We are assuming that after six months at least there will be some mining in Goa and we are taking at least 1.7 million tonne from Karnataka and close to 4.5 million tonne from Goa. So, we are modelling 5.4-5.6 million tonne for FY14.
Q: JSW Steel and Kalyani Steel were said that on an annual basis, six-seven million tonne of iron ore will get freed up for the state of Karnataka. What is your analysis of how much iron ore will be produced to get freed up now for the state?
A: We will go with that number - six-seven million tonne annually from category B mines. But that will not come in FY14. In FY15, it could be six-seven million tonne from category B. Category A could give six-seven million tonne and 10 million tonne from NMDC. So 22-25 million tonne of iron ore would be available for FY15.
Q: What is the impact on NMDC at all? Until now, people were depending heavily on NMDC and its auctions. Do you see a situation where by FY14, we will not be importing iron ore?
A: There will be little impact on NMDC because they have anyway taken huge price cuts over the last three months. We do not foresee any further decline in iron ore price for NMDC. Even the stock has bottomed out so a good level to enter into. In case of iron ore imports, we might see miniscule imports by some of the steel plants unless this category B mines ramp up fully. Overall, we do not see huge iron ore imports in FY14 also.
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