>SESA GOA: Western Cluster (Liberia project) on track with encouraging R&R findings. First shipment expected in FY14.

■ Sales volumes higher on stock clearance
While iron ore production for the quarter stood at 3.33 mt (vs 4.70 mt in Q3FY11), sales were at 5.04 mt (vs 4.84 mt in Q3FY11) on account of stock clearance of 0.64 mt from Karnataka through e-auctions and another ~1.1 mt from Goa (the company sold 4.4 mt of iron ore from Goa compared to 3.74 mt in Q3FY11). Goan mines continue to operate at full capacity (14 mtpa). Realization during the quarter improved at US$93/ tonne (US$ 84/tonne in Q2FY12) for iron ore due to improvement in grade by 0.5%. We believe the scope of significant improvement in realizations seems unlikely as further improvement in grade may not be possible and higher global supply should keep iron ore prices under check.


■ EBITDA margins remained under pressure on higher export duty
Effective Q1FY12, the export duty was hiked to 20% on both iron ore fines (from 5%) and lumps (from 15%). Consequently, the EBITDA margin contracted by 1330 bps to ~42% YoY on a comparable basis. Due to seasonality QoQ performance is not comparable. With further hiked in export duty to 30% effective 30th December, we believe pressure on the EBITDA margins to continue going ahead.


■ Strong regulatory headwinds continue to be an overhang
Karnataka continues to be under the mining ban since August 2011. The company has been left with ~0.2 mt of iron ore at the Karnataka. The Supreme Court hearing on the Karnataka mining ban continues to get deferred with no immediate respite. Further, report by the M B Shah Commission investigating illegal mining and export of iron ore (likely in March) can raise concerns even at Goan operations. Also, the implementation of mining bill and revision of royalty rates (due in August 2012) could have an overhang on our FY13 volume estimates of 16.5 mt.


■ Outlook and Valuations
At CMP of Rs 201, the stock is trading at 4.7x its FY13E EPS and 7.1x FY13E EV/ EBITDA. On SOTP basis, we value the iron ore business at 3.5xFY13EV/ EBITDA (giving a discount of ~15% to the global peers). Stake in Cairn India has been valued at 30% discount to current market cap. Thus, we arrive at a target price of Rs 191/ share. Retain Hold.


To read the full report: SESA GOA
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