Buy Sesa Goa; target Rs 237: R K Global

“Sesa Goa financials distress continues over imposed mining ban in Karnataka and hike in export duty highly impacted operational performance of the company. Top line grew by 16% Y-o-Y (our expectation 13.4%) on the back of inventory liquidation. EBITDA declined by ~26% Y-o-Y less than our expectation (our estimate 33% fall). However; PAT fell more than our expectation by 46% Y-o-Y. During the quarter, revenue of the company grew by 16.3% Y-oY to Rs 26170mn in Q3FY’12 (our estimate Rs 19481mn) compared to Rs 22499mn in Q3FY’11 on account of higher iron ore sales of 5.04mt compared to 4.36mt (excluding Orissa).The company liquidated its inventory of 0.64mt from Karnataka and 1.1mt from Goa led revenue growth of the company. However, production remain languish at 3.33mt compared to 4.29mt in corresponding quarter of previous year.”

“Total expenditure of the company grew by 44% as a percentage of sales to Rs 17098mn (our estimate Rs 11237mn) in Q3FY’12 compared to Rs 10195mn in Q3FY’11 out of which employee cost, raw material cost and S&D cost increased by 85%,69% and 10% respectively. Hence, EBITDA declined by 26.3% to Rs 9072mn in Q3FY’12 compared to Rs 12304mn in Q3FY’11. PAT also fell by ~35% with higher interest and depreciation cost. Total profitability of Sesa Goa declined by 46.6% to Rs 5695mn excluding Cairn profit of Rs 1219mn (our estimate Rs 6565mn) for this quarter. EBITDAM fell by 36.6% to 34.6% (our estimate 42%) in Q3FY’12 compared to 54.6% in Q3FY’11. PBDTM and PBTM fell by 45.5% and 46.4% to 32.5% and 31.5% respectively with increase in interest cost and low contribution from other income. PATM too declined to 21.7% (our estimate 33.7%) in Q3FY’12 compared to 48.5% in Q3FY’11.”

“We believe that the stock at this live has potential to see upside as the company is fundamentally strong and is expected to come back once the ban in Karnataka will lift up. However we have revised our valuation by cutting down our production estimate FY12 as Karnataka ban continued even after Dec. We cut down production estimate by 5.7% to 16mn ton for FY12 from our earlier estimate of 17mn ton. At CMP of Rs 203 the stock is trading at EV/EBITDAx of 3x FY2013E EBITDA of Rs 54782. We value the company based on Sum of parts-valuing a) its core operations on a FY13 EV/EBITDA multiple of 2.7x and b) Cairn Investment based on market cap (discounted at 30%). At our revised target price of Rs 237 per share (earlier target Rs 218/share), the stock offers a potential upside of around ~16 % from the current level; we recommend ‘hold’ rating on the stock with an SOTP based valuation,” says R K Global research report.

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