>SESA GOA LIMITED (MERRILL LYNCH)

■ Upgrade to Buy on stronger iron ore outlook, PO Rs435
We upgrade Sesa to Buy on stronger iron ore outlook. Despite a 70% rally in iron ore spot prices from April lows, we expect spot prices to rise further in FY11 due to tighter iron ore markets. We expect EPS to grow 68% to Rs35.7 in FY11 (20% above consensus) led by 22% increase in avg. spot prices. Despite sharp rally, Sesa trades at 6.9x FY11E EBITDA (6.3x based on FY11E net debt), at a 13% discount to global peers. There are upside risks to our EPS from higher spot prices. We estimate 1% higher spot increases EPS by 1.2%. Our PO set at 1.25x NPV, implies 12.5x FY11e EPS and 7.5x FY11e EBITDA.

Bullish on iron ore, Up to Buy

■ Tight iron ore markets to support higher spot prices
Our global team forecasts deficit of 24-55mn tons over 2010-11, led by strong Chinese import demand, steel output recovery ex China & limited new supply as the top 3 miners are operating at full capacity. Import demand from China should remain strong at ~50mn tons/month. We forecast avg. spot FOB price (current US$80/t) to increase by 22% to US$85/t in FY11 & by 7.3% to US$91/t in FY12.

■ Volume CAGR of 25% seen over FY09E-12E
We expect 3Q vols to disappoint as late rains hurt Sesa’s prodn/exports in Oct. But, we view any potential weakness in the stock as a particularly attractive buying opportunity as volume growth story is intact, led by mine expansions & consolidation of the Dempo acqn. We expect vols of 19.9mn tons in FY10 & 25.6mn tons in FY11. Sesa (net cash US$1.2bn) is exploring acquisition options. Scope for upsides from value-accretive M&A exists in our view.

■ Uncertainty around fraud investigation persists
The Serious Fraud Investigation Office recently initiated an inquiry into Sesa for financial & other irregularities. It appears, the inquiry pertains to an old complaint initiated in 2003, prior to Vedanta’s acquisition of Sesa. Hence, the issue may not be a big concern. However, it is hard to gauge the outcome of the investigation.

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