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 June 20, 2012 research report.

“Sesa Goa’s (SGL) annual report for 2011-12 indicates the company’s management is cautiously optimistic on the iron ore market. It may be recalled that SGL faced multiple headwinds like iron ore production as well as export ban in Karnataka, logistics issues in Goa and declining iron ore prices. Although we remain negative on iron ore prices and do not foresee any resolution of the above issues, SGL remains an insignificant play in the combined merged entity i.e. Sesa-Sterlite. We assign a Buy rating to the stock taking into consideration the combined entity’s valuation (a major portion of the valuation is driven by Cairn India and Hindustan Zinc) with a target price of Rs230 (earlier TP Rs241).”

“SGL continues to generate positive cash flow after capex and dividend, although it was the lowest in the past five years following lower net operating cash flow and higher dividend. It may be recalled that a large investment in Cairn India led to its net debt position from net cash. Goodwill on consolidation has risen by Rs4,337mn to Rs19,071mn, primarily driven by the acquisition of Western Cluster in Liberia. However, we do not foresee any need for amortisation and impairment of goodwill because of a decent profitability ratio. Inventory and debtor turnover days deteriorated on quarterly basis, although debtor turnover improved on annual basis. Trade payable days declined marginally on annual basis, but witnessed a steep drop on quarterly basis. The company`s auditors have indicated that short-term debt has been raised for long-term investment, but we do not see any cause for concern as the company`s core iron ore business continues to generate sizeable cash, which would be utilised to pay off this debt in the current year.”

“In the merged entity, i.e. Sesa-Sterlite, iron ore business accounts for only 10% and 8% of our EBITDA estimates for FY13E and FY14E, respectively. We continue to maintain our negative stance on the iron ore sector because of concerns over Chinese demand and higher supply from across the world. We remain constructive on the zinc and crude oil segments, which account for 73% of our EBITDA estimates for the combined entity for FY13E and FY14E each. We retain our Buy rating on the stock with a revised target price of Rs230, which is 30% higher than the CMP,” says Nirmal Bang research report.

Non-Institutions holding more than 90% in Indian cos

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