>SESA GOA: Regulatory checks weigh down performance

⇒ Topline in line with estimates at Rs 7897 mn, down 14% YoY and 63% QoQ on low realizations and on sales volume of only 1.55 mt


⇒ EBITDA was down 92% YoY and 97% QoQ at Rs 259 mn including forex loss of Rs 2600 mn, well below estimates. EBITDA/ tonne for iron ore business stood at US$33


⇒ PAT on the back of other income of Rs 504 mn was reported at Rs 12.8 mn. Adjusted for forex loss and tax rate, the PAT stood at Rs 1.6 bn, lower than our estimates of Rs 2.04 bn


⇒ Cutting core EPS estimates for FY12E and FY13E to Rs 24 and Rs 29. We reduce our SOTP target price to Rs 239; Assign Hold rating on the stock


Lower volume and realizations impacted the topline
As reported earlier, iron ore production for the quarter was 1.12 mt (vs 2.88 mt in
Q2FY11) and sales were at 1.55 mt (vs 1.82 mt in Q2FY11). The lower production and
sales are attributed to mining ban in Karnataka, discontinuing of operations in Orissa
and most importantly, planned reduction of inventories. In the quarter, the company sold
0.71 mt and 0.83 mt of iron ore at Karnataka and Goa respectively. Realization during
the quarter remained subdued at US$84/ tonne for iron ore (taking average USDINR at
45.8). We believe, iron ore realizations to remain stable to weak in the immediate future,
whereas, volume growth remains uncertain due to continuing mining ban in Karnataka
and problems arising in Goa.


Raw material costs and INR depreciation depleted the EBITDA
During the quarter, EBITDA was largely impacted by increase in raw material costs and
loss on foreign currency loans and FCCBs. While the raw material costs as a
percentage to sales increased from 4% in Q1FY12 to 13% in the Q2FY12 (6% in
Q2FY11), the forex losses amounted to Rs 2.34 bn, depleting EBITDA to a large extent.
The EBITDA margin came in at 3% as against 54% in the same quarter previous year.
EBITDA/ tonne stood at US$33 during the quarter. We believe weak INR would
continue to be a deterrent for foreign currency outstandings.


Karnataka mining impasse continues; Goa could be a spoil sport
Karnataka continues to be under the mining ban. The company did not sell any amount
through e-auction form Karnataka during the quarter. During October, Sesa sold ~0.3 mt
out of total 0.8 mt inventory. The company is hopeful that Karnataka issue will be solved
by Q4FY12. We believe, Goa could be a spoil sport, as issues related to illegal mining
and export of iron ore are under comprehensive investigation by the Shah Committee.


To read the full report: SESA GOA