>SESA GOA (MORGAN STANLEY)

Quick Comment; Dempo Acquisition – A Value Accretive Proposition

Impact on our views: We are encouraged by Sesa’s proposed acquisition of Dempo’s mining assets and by management’s ability to deliver on its promise to utilize its strong balance sheet to enhance Sesa’s size and competitiveness. In our view, the stock should react positively to this event. However, we would note the very strong performance that Sesa stock has displayed
in the last 3-4 weeks.

Sesa Goa announced that it has agreed to acquire VS Dempo Ltd for US$368mn (Rs17.5 bn) on a debt-free and cash-free basis. This will be funded out of Sesa’s cash balance of US$872mn. Dempo produced 4mt of iron ore (sales were higher at 4.4mt) in FY09. The acquisition would increase the size of Sesa Goa’s 16mt production during the same period by 25%. Based in Goa, Dempo is amongst the largest second tier ore exporters from India. We estimate the acquisition could lift our F10e EPS for Sesa by ~12%.

Looks like a value accretive acquisition to us, especially due to opportunities to share infrastructure in Goa and possibility of further exploration ay Dempo.

EV/t of US$90/t of production looks attractive for Sesa versus global average of over US$200/t of production of the major iron ore producers (and US$160/t for Sesa).

Reserves of Dempo at 70 mt seem to be on the smaller side (18 year mine life) but here too, the acquisition EV/t of US$5/t is less than that of Sesa of US$12/t.

EV/EBITDA multiple for proposed acquisition price works out to be 4x on F09 basis vs. 4.7x for Sesa. In F09 Dempo had an EBITDA margin of 43% vs. that of 51% for Sesa Goa. Notably, Vedanta had bought 51% stake in Sesa at EV/t of US$9 on reserves and US$160 on
production.

To see full report: SESA GOA