Accumulate Sesa Goa; target Rs 227: PINC Research

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Accumulate Sesa Goa; target Rs 227: PINC Research

PINC Research is bullish on Sesa Goa and has recommended accumulate rating on the stock with a target price of Rs 227 in its January 27, 2012 research report.

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RELATED NEWS Buy Petronet LNG; target Rs 209: LKP Buy Godawari Power; target of Rs 185: Motilal Oswal Buy IRB Infra; target of Rs 229: Dolat Capital ALSO READ See previous views by PINC Research See what other Experts & Brokerages are saying about Sesa Goa See messages about Sesa Goa Sesa Goa BSE | NSE 30/05/12 Are Mutual Funds betting on Sesa Goa?

PINC Research is bullish on Sesa Goa and has recommended accumulate rating on the stock with a target price of Rs 227 in its January 27, 2012 research report.

"Sesa Goa's Q3FY12 revenue rose 16% YoY to Rs26bn, driven by iron ore volume (up 5.4% YoY to 5.04mnt) and 13% YoY rupee depreciation despite lower realisations (down 4% YoY to USD93/t). However, operating profit declined 12% YoY to Rs11bn while OPM at 41.5% contracted 1,322bps YoY on higher export duty and coking coal cost. Adj. PAT declined 23% YoY to Rs8.2bn despite Rs1.2bn share of profit in associate Cairn India (20% stake, for 23days only), on lower EBITDA and higher tax rate. Reported PAT at Rs6.9bn was further impacted by forex loss of Rs1.2bn (adj. for 30% tax)."

"Sales volume at 5.04mnt (DMT) rose 5.4% YoY on ~1.7mnt stock liquidation in Goa and Karnataka. Further, due to better ore grade in Goa and higher share of Goa in the sales mix (87% in Q3 vs 55% in Q2), blended realisation at USD93/t grew 11% QoQ despite 18% QoQ decline in spot price and lower exmine realisation in Karnataka (USD31/t vs USD40/t in Q2). Realisation for Goa ore at USD102/t (FOB-basis) fell 15% QoQ, in line with spot price.  Iron ore EBITDA/t declined 23% YoY to USD42 as operating cost/t at USD51 grew 20% YoY on higher export duty. Recent hike of export duty to 30% would further hike Sesa's operating cost Q4FY12 onwards. Revenue grew 27% & 17% YoY respectively on higher volume and better realisations. However, profitability declined on higher coking coal cost. Sesa increased stake in Cairn India to 20% during Q3, making it an associate. Sesa has debt of Rs43.8bn and cash and eq. of Rs4.5bn, post investment in Cairn India (Rs130.3bn) and Western Cluster, Liberia (USD90mn). Expansions of 375ktpa of pig iron and 280ktpa of met coke at a capex of Rs6.1bn are expected in Q4FY12. Western Cluster project in Liberia is expected to commission by FY14, though we have not factored it in our estimates."

"Sesa's stock has declined by 60% since Apr-10, on a series of concerns impacting the stock, important being hike in export duty, ban on mining in Karnataka, decline in iron ore prices and stake acquisition in Cairn India. Although majority of concerns are now factored in the price, there is still uncertainty pertaining to Supreme Court's decision on mining in Karnataka and export of ore from Goa (Shah Committee has advised complete ban). However, we expect favorable decisions in these cases due to dire iron ore supply situation in Karnataka and little use of Goan ore in India. We have assumed iron ore volume for Sesa Goa of 16.8mnt & 21mnt for FY13E & FY14E respectively. To factor in the risk associated with the estimates, we discount Sesa's cash flow at a WACC of 18%. We recommend Accumulate on the stock with a DCF-based TP of Rs 227," says PINC Research report.

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