>Sesagoa(Morgan Stanley)

Upgrade to OW; Rs280 price target implies ~23%
upside. The change in our stance, despite the recent
sharp run-up in the stock price, is driven by: 1) Iron ore
prices are looking much stronger than we anticipated
earlier; demand looks set to increase further with
gradually rising utilization of steel mills; and 2) Sesa’s
growth plans will accelerate in the next two years with
solid addition to its reserves and resources and a
meaningful reduction in production costs. We project a
CAGR of 28% for ore sales volume and an EPS CAGR
of 12.4% for F2009–12, although we acknowledge some
upside risk to this figure.
Raising F2010–11E EPS by 53-97%: In line with our
global mining team’s assumptions, we now estimate a
rollover in iron ore contract prices in F2011 vs. a forecast
10% decline earlier. We have also increased our spot
price estimates by 58% for F2010 and 46% for F2011.
We include Sesa’s recent acquisition of Dempo Mining,
valued at Rs20/share, in our analysis. Any news on
further exploration success or an accretive acquisition in
India could boost the stock price further.
Spot iron ore prices on an uptrend: Spot prices,
although still 50% below 2008 peak levels, have
increased ~25% in the last month to US$110/t CIF
China. With the likelihood of better global steel demand
in the next 3-4 quarters, steel production should pick up,
keeping ore prices strong. Sesa stock trades at a P/E of
7.7x and EV/EBITDA of 3.5x on our F2011 estimates,
which seems undemanding relative to 14x and 6.6x,
respectively, for iron ore players in our global coverage.

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