Buy Sesa Goa; target of Rs 230: Nirmal Bang

Nirmal Bang is bullish on Sesa Goa and has recommended buy rating on the stock with a target of Rs 230 in its July 25, 2012 research report.

“Sesa Goa (SGL) organised a conference call on 25 July 2012 regarding its 1QFY13 performance. Current iron ore realisation for 63% Fe grade stands at US$114-115 on FoB (Freight on Board) basis compared to US$130-135/tn at the beginning of 1QFY13. SGL booked a forex loss of around Rs2,820mn during the quarter, partially accounted for as interest costs to the tune of Rs500mn while the rest is shown as an exceptional item. The forex loss is on account of outstanding FCCBs, other foreign liabilities and buyers’ credit. SGL got the Central Empowered Committee’s (CEC) concurrence for the reclamation and rehabilitation (R&R) plan of its mine in Chitradurga, Karnataka, for an annual output of 2.29mt. Although the company has total capacity of 6mt in Karnataka, the approved capacity is in line with the CEC’s recommendation to limit mining output in Chitradurga and Tumkur regions of Karnataka to 5mt.”

“The company has indicated that negotiations with transporters in Goa are at final stage and it expects the problem to be resolved at the beginning of 3QFY13. The temporary restriction on transportation of iron ore in South Goa (effective mid-June to mid-September) due to the monsoon season has been partially lifted subject to certain conditions. However, 2Q is normally a weak quarter seasonally and therefore there would not be much volume loss during the quarter. SGL has given guidance of Rs3,600mn capex for FY13E, which includes Rs2,500mn maintenance capex and Rs1,100mn expansion capex. This is lower than the earlier capex guidance of Rs6,000mn (Rs4,000mn maintenance capex and Rs2,000mn expansion capex). The company has indicated that work on Western Cluster deposits in Liberia is progressing well and it is targeting first shipment in FY14, from phase-I. It has given broad capex guidance of Rs4,000-Rs4,500mn for FY13E. The company is facing headwinds at its pig iron and met coke plants. It has delayed the commissioning of new expansion projects by a quarter, while unavailability of iron ore in the wake of South Goa transportation constraints would hurt the operations at pig iron and met coke plants. We have cut our estimates in respect of pig iron and met coke volumes, accordingly. SGL continues to maintain its volume guidance of 14-15mt from Goa and expects the lost volume in the first-half of FY13 to be compensated in the second-half. We refrain from assuming a strong recovery in the second-half and expect a volume of 13.3mt in Goa. The company expects 2.29mt (wet metric tonne) volume from Karnataka in FY13, while we are factoring in a volume of 1.5mt (dry metric tonne).”

“We have revised our FY13E and FY14E EBITDA estimates downward by 5% and 8%, respectively, due to the above factors, while PAT estimates have been pruned by 7% and 3% for the same period. We have also updated capex estimates after the latest guidance and Cairn India’s consensus projections after the 1QFY13 results. We have not revised our TP as there is no material change in the combined entity,Sesa-Sterlite’s valuation. We may revise the combined entity valuation after Sterlite Industries’ results, which are scheduled on 26 July 2012,” says Nirmal Bang research report.    

Public holding more than 90% in Indian cos

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