>Sesa Goa (ANGEL BROKING)

' Not Enough ‘Iron ’

Sesa Goa (SGL), a subsidiary of Vedanta Resources Plc., is India's largest private player in iron ore exports with combined Iron ore reserves of 180mn tonnes. Amidst the ongoing downturn, we estimate the company's Earnings to decline at a compounded rate of 8.4% during FY2008-10E, owing to the weak pricing outlook for the next two years. Even so, we believe that SGL is the most insulated player in the current downturn considering its low cost operation, zero debt and strong cash balance of Rs3,219cr (Rs41/share). At Rs105 the stock is trading at a P/E of 4.3x and 6.4x FY2009E and FY2010E EPS and EV/EBIDTA of 2.1x and 2.2x FY2009E and FY2010E EBIDTA, respectively. With the recent run up of around 40% in the stock, we believe the stock is fairly valued. Hence, we Initiate Coverage on the stock with a Neutral recommendation, with a Fair Value of Rs112.

* Volume Growth achievable: We estimate the company to post 21% CAGR in iron ore volumes over FY2008-10E as against the management's optimistic guidance of over 25% growth in iron ore volumes over the next 2-3 years. It may be noted here that the company posted 12.5% CAGR in iron ore volumes in the last five years.

* Most insulated amidst downturn: We believe that SGL is insulated from the current downturn considering its huge cash and cash equivalents of Rs3,219cr in FY2009E (fetches Rs41/share) and it's zero debt on the book. We also believe that considering SGL's low cost of operation compared to its domestic peers, company is well placed to eat into the market share of small high cost Indian iron ore exporters, amidst falling prices.

* Contract Iron ore prices to be settled 30-40% lower: Worldwide iron ore contract negotiations for FY2010 are currently progressing. Negotiations signal weak iron ore prices at 30-40% lower levels owing to the slowdown in steel demand globally and especially in China. The Spot iron ore prices in China have also collapsed by more than 65% to US $64 from the peak of US $186 during July 2008. We also estimate the Australian FOB Iron ore fines contract price to be 30% lower yoy at US $64/tonne in FY2010. Overall, we believe that the weak pricing outlook in the next two years will pressurise SGL's Earnings and expect it to de-grow at a compounded rate of 8.4% during FY2008-10E.

To see full report: SESA GOA