Accumulate Sesa Goa; target Rs 196: Aditya Birla Money

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Accumulate Sesa Goa; target Rs 196: Aditya Birla Money

Aditya Birla Money is bullish on Sesa Goa (SGL) has recommended accumulate rating on the stock with a target of Rs 196 in its December 22, 2011 research report.

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Aditya Birla Money is bullish on Sesa Goa (SGL) has recommended accumulate rating on the stock with a target of Rs 196 in its December 22, 2011 research report.

"Sesa Goa (SGL) has had a steep correction in its stock price since our last update on 1st November 2011. The possibility of a ban on iron ore mining or an export ban in Goa (where ~75% of SGL's annual mining capacity is situated) has been an overhang on the stock. Also, global iron ore spot prices (CIF) have declined ~25% to $135 per tonne. However, rupee depreciation is mitigating a sizeable part of the impact of the fall in global iron ore prices on SGL's earnings. We revise our EPS estimates for FY12E and FY13E to account for the impact of the current weakening of spot iron ore prices and rupee depreciation."

"In our base case scenario, in view of the increased global uncertainties and investor risk aversion, we increase the discount on the market value of Cairn India investment to 40% as compared to 30% earlier. Our base case scenario throws up a 1 year forward DCF value of Rs 206, a decrease of 9.6% from our earlier value of Rs 228. In our stress case scenario, we assume that there would be a ban on iron ore mining in Goa for about a year from Q4FY12E to Q3FY13E. We estimate this to result in a production loss of ~14.6mn tonnes for SGL. Also, an export ban on iron ore in Goa would almost be akin to a ban on iron ore mining for SGL as it primarily sells iron ore fines which would not have a domestic market on account of lack of iron ore processing facilities on the part of Indian steelmakers and high inland freight costs for those who do have them. In our stress case scenario, we also assume iron ore prices (FOB) at $80 per tonne as compared to $95 per tonne in the base case. In valuing SGL's Cairn investment, we also increase the discount on the market value of the investment to 50% as compared to 40% in the base case."

"Our stress case scenario projects a severe decline in SGL's FY13E EPS to Rs 2.0 but gives a 1 year DCF forward value of Rs 176 for SGL, which implies a potential upside of 10.2% from the CMP. The important thing to note is that the ban on iron ore mining or an export ban on iron ore in Goa is unlikely to be for an indefinite period and its impact in the long term would be limited to a postponement of depletion of SGL's finite domestic iron ore reserves further into the future. Thus, it would impact only near term earnings and not have a significant impact on the long term value of SGL."

"On account of the overhang of a possible ban on iron ore mining or an export ban in Goa, we value SGL at a discount of 5% to our base case 1 year forward DCF value of Rs 206, giving us a fair value of Rs 196. Our target price of Rs 196 for SGL implies a potential upside of 22.7% from the CMP. Note that we have been conservative in our DCF assumptions, assigning a terminal growth rate of 0% and a cost of equity of 14.5%. Even our stress case scenario would give a potential upside of 10.2%. We, thus, upgrade our rating to Accumulate from Neutral on Sesa Goa," says Aditya Birla Money research report.

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