>SESA GOA: A ttractive at current valuations

■ India’s largest iron ore exporter; a play on volume growth
We assume coverage of Sesa Goa (Sesa) with a Buy rating. We forecast FY2011/2012 PAT will rise 60%/8%, driven by 55%/0% growth in realisations and 9%/26% growth in volume. Sesa is India’s largest iron ore exporter (it exports around 94% of total sales by volume) and iron ore contributed 97% of EBITDA in FY10 (it also has metcoke/pig iron businesses). It expects iron ore capacity to increase to 50mt by end-FY12 (from around 25mt currently). Sesa has proven plus probable (2P) reserves of 353mt (it produced around 21mt in FY10).

■ Key upside catalysts: strong iron prices; inorganic growth; new reserves
Sesa is a direct play on spot iron ore prices. We assume US$114/t India free-onboard (FOB) price for iron ore fines with 63.5% Fe grade (US$81/t for 58% Fe grade, a 29% discount) in FY2011/2012. Its share price is likely to react positively on new reserve findings. Sesa added 97mt of new reserves over the past two years from new exploration (compared to the 37mt it produced). It also added 70mt of 2P reserves from its acquisition of the Dempo mines in 2009.

■ Downside risks: higher mining taxes; a significant decline in spot prices
We do not assume a significant downside to iron ore prices from current levels (a 1% decline in iron ore prices would lead to 1.8% decline in earnings). Another risk is if the government imposes a mining tax or increases the export duty/royalty.

■ Valuation: assume coverage with Buy rating and Rs440.00 price target Given limited current reserves (around eight years of production) but aggressive reserve findings, we believe it will not be fair to value on an NPV basis. Hence, we value Sesa on 4.5x FY12E EV/EBITDA, the average valuation of its global peers for 2011.

To read the full report: SESA GOA