Aditya Birla Money neutral on Sesa Goa; target Rs 228

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Aditya Birla Money neutral on Sesa Goa; target Rs 228

Aditya Birla Money has maintained neutral rating on Sesa Goa (SGL) with a target price of Rs 228 in its November 1, 2011 research report.

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Aditya Birla Money has maintained neutral rating on Sesa Goa (SGL) with a target price of Rs 228 in its November 1, 2011 research report.

"Sesa Goa (SGL)'s consolidated net sales declined 14% YoY to Rs 7.9bn on account of (1) lower iron sales volume at 1.55mn tonnes (down 14.8% YoY) on account of the ban on iron ore mining in Karnataka and closure of third party mines in Orissa and (2) lower pig iron sales volume at 64611 tonnes (down 23.1% YoY). SGL's consolidated adjusted EBITDA declined 14.3% YoY to 2.6bn on account of poor performance of the pig iron and coke business. In the coke business there was a foreign exchange translational loss of ~Rs 250mn on acceptances for coking coal purchases. Pig iron production and sales volume was affected due to lower availability of iron ore and lower demand from foundries. Higher iron ore business margins (iron ore EBIT margins at 39.9%, up 944bps) on account of higher global iron ore prices helped offset some of the decline in overall EBITDA. Reported  EBITDA was primarily down on account of mark-to-market loss of Rs 2.3bn on foreign currency borrowings. Iron ore royalty for Q2FY12 was higher-than-expected at ~Rs 325 per tonne. SGL's consolidated adjusted PAT declined 54.0% to Rs 1.6bn on account of (1) lower EBITDA and (2) higher interest expenses and lower interest income."

"Sharp fall in spot iron ore prices: In the month of October 2011, spot iron ore prices (CIF) have fallen sharply by 25-30% from $170 per tonne to $125-$130 per tonne levels. We lower our spot iron ore price (FOB) assumptions for H2FY12E from $120 per tonne to $110 per tonne. We keep our iron ore price (FOB) assumptions for FY13 unchanged at $110 per tonne.Revise EPS estimates downwards: Factoring in less-than-expected performance of the pig iron and coke business and lower iron ore costs, we lower our adjusted EPS estimates for FY12 and FY13 by 18.6% and 2.8% to Rs 22.9 and Rs 18.6 respectively. Note that we have not assumed any resumption of production of iron ore from Karnataka in Q4FY12E.

SGL's management expects the current ban on iron ore mining in Karnataka to be lifted for select mines (including Sesa Goa), where violations have been minor, by Q4FY12E. With the revision of earnings estimates downwards, our 1 year forward DCF based target price decreases to Rs 228 from Rs 232 earlier. This implies a potential upside of 9.5% from the CMP. We maintain our Neutral Rating on Sesa Goa with a target price of Rs 228," says Aditya Birla Money research report.

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To read the full report click on the attachment