Tuesday, January 3, 2012

>SESA GOA: Government raises export duty

■ Government raises export duty on iron ore: The government has raised export duty on iron ore to ad valorem 30% on lumps and fines, with effect from December 30, 2011, compared to 20% earlier. Iron ore exports from India have already declined by 25.2% to 35.4mn tonnes from April-October 2011 on account of export ban in Karnataka, stringent measures in issuing export permits in Odisha, a sharp decline in international iron ore price and increased export duty. Post the export duty hike, rise in rail freight and the recent decline in iron ore price are expected to severely affect iron ore exports from India. Before the export duty hike (as per Federation of Indian Mineral Industries), total iron ore exports during FY2012 were estimated to be 60mn tonnes compared to its previous estimate of 75.0mn tonnes. We now expect iron ore exports to be lower than 60mn tonnes during FY2012. While Sesa Goa’s profits are expected to be affected adversely, we do not expect any impact on NMDC’s financials as we do not expect any export of iron ore by NMDC during FY2012 and FY2013.

■ Higher export duty to affect Sesa Goa’s profitability: Sesa Goa generates ~90% of its net sales from iron ore exports. Hence, the export duty hike would increase the company’s export duty expenses without any corresponding increase in iron ore prices. Accordingly, we have raised our export duty expenses for Sesa Goa to `1,681cr (previous estimate – `1,390cr) for FY2012 and to `1,932cr (previous estimate – `1,546cr) for FY2013. Also, we now believe some of the Karnataka iron ore would now be sold domestically, as EBITDA/tonne may not favor exports anymore. Our EBITDA estimates for FY2012 and FY2013 stand pruned by 8.1% and 9.1% to `3,314cr and `3,712cr, respectively.

Outlook and valuation
Despite the recent correction in spot iron ore prices, we expect international iron ore prices to remain firm in the medium term, as we expect additional meaningful supplies to hit the sea-borne market only from CY2014. We believe the current stock price discounts negatives such as acquisition of a minority stake in the unrelated oil business via acquisition of Cairn India’s stake, increased export duty, higher railway freight and lower volumes from Goa mines. We recommend Buy on the stock with an SOTP-based target price of `195 (`213 earlier).

To read the full report: SESA GOA