Result Update on Sesa Goa for 4QFY2011

Sesa Goa’s 4QFY2011 net sales at `3,624cr were ahead of our estimate of `2,654cr on account of higher-than-expected iron ore realisation. Net profit at `1,462cr was also above our estimate of `1,281cr.

Top-line growth aided by higher realisation: Despite lower production during 4QFY2011 due to export ban in Karnataka and termination of third-party mining in Orissa, sales volume grew marginally by 1.7% yoy to 7.5mn tonnes (wmt basis). However, higher iron ore realisation led to 49.8% yoy growth in the top line to `3,624 in 4QFY2011. During the quarter, iron ore realisation increased by 52.2% to US$100/tonne. On the operating front, EBITDA grew by 40.9% yoy to `2,118cr. However, EBITDA margin contracted by 368bp to 58.5% yoy as the positive impact of higher realisation was offset by increased royalty rates and higher export duty and freight cost. Other income grew by 30.9% yoy to `169cr, but tax rate increased by 34.7%, leading to only a 20.5% yoy increase in the bottom line to `1,462cr.

Outlook and valuation: Sesa Goa’s reserves and resources (R&R) continue to increase annually on account of its exploration activities. The company reported an increase in its R&R to 306mn tonnes as of March 31, 2011 (274mn tonnes as of March 31, 2010), indicating a mine life of over 14 years based on FY2011 production. We believe the current stock price discounts negatives such as acquisition of minority stake in unrelated oil business via Cairn India’s stake acquisition, increased export duty and railway freight and muted volume growth from Goa mines. Sesa Goa is currently trading at 3.2x FY2012E and 2.3x FY2013E EV/EBITDA. On a P/BV basis, the stock is trading at 1.7x FY2012 and 1.4x FY2013 estimates. We maintain our Buy rating on Sesa Goa and raise our target price to `385 (`382), valuing the stock at 3.3x EV/EBITDA.

Result Flash on Sesa Goa for 4QFY2011

Sesa Goa announced its 4QFY2011 results yesterday, reporting total sales growth of 49.8% yoy to Rs3,624cr, above our estimates of Rs2,654cr. Total sales were above our expectations on account of higher-than-expected realisation on iron ore sales as well as sales volumes. We will raise our iron ore sales realization estimates modestly for FY 2012 and FY2013. However, we await for further clarity on sales volumes growth and Cairn acquisition in the upcoming conference call with the management. We maintain our BUY rating on the stock.

4QFY2011 consolidated result highlights-  

·         Total sales increased 49.8% yoy  to Rs3,624cr above our expectation of Rs2,654cr. Total sales growth was primarily driven by increase in iron ore realisation to US$100, (US$66 in 4QFY2010). Iron ore sales volumes increased to 7.5mn tonnes on wet-metric-tonne basis (7.4mn tonnes in 4QFY2010).

·         EBITDA increased 40.9% yoy to Rs2,118cr, however EBITDA margin declined 360bp yoy to 58.5% mainly on account of increase in export duty and raw material costs.

·         Other income increased 30.9% yoy to Rs169cr. Consequently, net profit  increased 20.5% yoy to Rs1,462cr, above our estimate of Rs1,281cr.

·         The company’s total resources and reserves increased to 306mn tonnes as on 31 March 2011(compared to 274 mn tonnes as on 31 March 2010).

·         On 19 April 2011, Sesa acquired 200mn shares (10.4% stake ) in Cairn India Limited from Petronas International Corporation at Rs331 per share. Further, Sesa has launched the open offer to acquire upto 20% stake in Cairn India at Rs355 per share.

·         During 4QFY2011, Sesa acquired the assets of the partially constructed steel plant unit (0.5mn tonnes) of Bellary Steel for Rs220cr. However, the acquisition has been challenged by JSW Steel in the Supreme Court.

·         The company had a cash & equivalents amounting to Rs10,682cr (Rs120 per share) as on 31 March 2011.

  Exhibit 1: 4QFY2011- Actual vs. Estimates

(All values in Rs cr) Actual Estimates Variation (%) Net Sales 3,624 2,654 36.5 EBITDA 2,118 1,502 41.0 EBITDA margin (%) 58.5 56.6 186bp PAT 1,462 1,281 14.1 Source: Company, Angel Research

Exhibit 2: 4QFY2011 Performance summary

(All values in Rs cr)	4QFY11	4QFY10	YoY%	FY2011	FY2010	YoY%
Total sales	3,624	2,419	49.8	9,205	5,858	57.1
Raw Material	435	186	133.3	858	534	60.6
% of Net sales	12.0	7.7		9.3	9.1
Consumption of Stores	96	69	39.4	296	244	21.6
% of Net sales	2.6	2.8		3.2	4.2
Staff Cost	67	45	48.8	207	169	22.5
% of Net sales	1.8	1.8		2.2	2.9
Export Duty	365	121	200.4	662	148	348.6
% of Net sales	10.1	5.0		7.2	2.5
Other Expenditure	185	509	(63.7)	1,680	1,642	2.3
% of Net sales	5.1	21.1		18.3	28.0
Total Expenditure	1,505	916	64.3	4,057	2,713	49.5
% of Net sales	41.5	37.9		44.1	46.3
EBITDA	2,118	1,503	40.9	5,148	3,145	63.7
% of Net sales	58.5	62.1		55.9	53.7
Interest	14	23	(37.6)	55	52	6.9
Depreciation	37	17	122.7	96	75	29.3
Other Income	169	129	30.9	557	426	30.8
Exceptional Items	3	0
Profit before Tax	2,240	1,593	40.6	5,560	3,445	61.4
% of Net sales	61.8	65.8		60.4	58.8
Tax	778	378	106.0	1,337	806	66.0
% of PBT	34.7	23.7		24.1	23.4
Reported net income	1,462	1,213	20.5	4,214	2,629	60.3

Source: Company, Angel Research

Outlook and valuation: Sesa reported stellar profitability during 4QFY2011. We expect iron ore prices to remain firm during FY2012-13. At current levels, the stock is trading at 3.3x FY2012E and 2.5x FY2013E EV/EBITDA. We maintain our Buy rating on the stock while we keep our target price under review.

Financial summary

Y/E March (RsCr)	FY2009	FY2010	FY2011E	FY2012E	FY2013E
Total Sales	4,959	5,858	9,205	11,006	12,290
% chg	31.7	18.1	57.1	19.6	11.7
Net Profit	1,988	2,629	4,214	3,415	3,741
% chg	28.4	32.2	60.6	(19.1)	9.5
FDEPS (Rs)	25.3	29.6	47.5	38.4	42.0
OPM (%)	51.3	53.7	56.5	44.3	43.6
P/E (x)	12.4	10.6	6.6	8.2	7.5
P/BV (x)	5.2	3.3	2.1	1.7	1.4
RoE (%)	51.9	41.6	39.2	22.6	20.5
RoCE (%)	63.9	41.7	43.1	29.3	25.6
EV/Sales (x)	3.7	3.1	1.5	1.4	1.1
EV/EBITDA (x)	7.3	5.8	2.6	3.3	2.5