sesa goa -q4fy10

8/9/2019 SESA GOA -Q4FY10

1/6

RESEARCH

Introduction

Expectation & Recommendation

OPERATIONAL DETAILS

Production Details

Sesa Goa Ltd. has reported a steller 4th quarter financial result. The company has

posted an impressive growth in its volume offtake thanks to the Dempo acquisition

earlier this year. During Q4, the Company produced 7.8 million tonnes of iron ore,

taking the full year production to 21.4 million tonnes, an increase of 60% and 34%

respectively, compared with the corresponding prior period last year. Iron ore

dispatches during quarter and year ended March 2010 were 7.4 million tonnes and

20.5 million tonnes respectively, an increase of 47% and 36% compared with the

corresponding prior periods. During the same period, Dempo contributed 1.8

million tonnes and 3.6 million tonnes respectively, to the total dispatches. The

company management, in the conference call, has reiterated that it will continue

to maintain a growth rate of 25-30% for the next fiscal as well and for FY11 total

production and sale can go upto 30 million tons.

We expect that FY11 would be significantly better than the last year for the

company and is expected to report 70% growth in revenue, 64% growth in

EBITDA and 66% growth in PAT respectively, however, from FY12 onward the

company is expected to report muted growth in all aforementioned parameters.

At the current market price of Rs. 457/- The stock is trading at a forward P/Ex of 6,9.28 and 9 based on FY11E, FY12E and FY13E EPS of Rs. 76.9, Rs. 49.3 and Rs. 50.7

respectively. Thus we recommend Hold on the stock but advise to sell if the

price cross Rs. 515-525/share.

The company has had the best quarter in its history both in terms of volume growth

and in terms of the realisation that the company managed to get. As mentioned

before, the company produced 7.8 million tons of iron ore in the quarter under

review, in Q3FY10 the production has been 5.562 million tonnes and Q2FY10 the

production has been arround 1.619 million tonnes. Thus there has been 40.24%

growth in production of iron ore on QoQ basis. The production mix of iron ore has

been presented in the following pie chart:

EUREKA RESEARCH www.eurekasecurities.com

HOLD

22nd APRIL, 2010 Q4FY10 Update

SESA GOA LTD.

Recommendation

CMP

TARGET

: Rs. 457.00

: Rs. 525.00

COMPANY DETAILS

SHARE HOLDING PATTERN

FINANCIAL HIGHLIGHTS

BSE Code

NSE Symbol

Bloomberg Code

Market Cap (Rs. Crs)

Free Float (%)

52-wk H/L (Rs.)

Avg. Daily Volume

Face Value

Beta

Promoter

FII

Financial Institutions

Others

FY10' [Consolidated]

[Rs. Crs.]

Share Capital

Debt

Net Sales

PAT

EPS (Rs.)

Share price graph (Rs)

500295

SESAGOA

SESA IN

38684

48.82

494/107

1056265

Re. 1

1.08

57.03

26.56

3.47

12.98

83.096

Nil

6615

1994

31.62

ANALYST

Kinshuk Acharya

[email protected]

91-33-3918 0386 - 87


2/6

Average Realisation

Other Details

Financial Highlights

The company has been consistently witnessing an increase in realisation

quarter over quarter as can be witnessed in the adjacent graph :-

As we can see that the average realisation per ton for the company has

increased by 14% on QoQ basis, which when compared with the price increase

that occurred between Q3 and Q2 of FY2010 which has been in the region of 3%

only, the increase in the last quarter has been extremely robust.

During the quarter the company has made a net addition to its reserve and

resources by 43 million tons. With this the total reserve and resource of the

company has become 353 million tonnes in its own mines. The distribution of

reseve and resources as on 31st March 2010 are given below:

As per the management the expansion of the pig iron plant capacity to 625 ktpa

and the associated expansion of the metallurgical coke plant capacity to 560

ktpa are progressing as per schedule and expects the commissioning of the

same by Q1 FY 2012. The total cost for the project would be in the vicinity of Rs.

605 crore

Z Revenue for the company came at Rs2,403.54 crore compared to Rs1429.9 for the corresponding quarter last year and Rs. 1889 crore

in the 3rd quarter FY10. Which signifies a 68% groth on yoY basis and 27% growth on QoQ basis.

Z On consolidated basis the company has reported an EBITDA of Rs. 1632.07 crore compared to Rs. 810.2 crore in the corresponding

quarter last year, signifying a growth of 101% growth in EBITDA on YoY basis. The EBITDA Margin has improved to 58% compared to

52% in the corresponding quarter last year. On full year basis the EBITDA margin has improved from 53% last year to 54% in FY10.

Z Profit from operations came at Rs. 1486.37 crore in the quarter under review on consolidated basis compared to Rs. 738.47 crore in

the corresponding quarter last year. The Operating profit margin has improved to 53.1% during the quarter compared to 47% in the

corresponding quarter last year.

Z On consolidated basis the company has reported operating profit margin of 53% and 46.4% for the 4th quarter and FY10 compared to

47% and 47.6% for the corresponding period last year and for FY09 respectively.

Z Compared to the last year the other income for the company has gone up by 90% to 425.97 crore from 224.03 in FY09. This rise in

other income can be attributed to Rs. 55 crore MTM gain booked for FCCB of $500 mn issued by the company earlier.

Z The Ocean freight for the quarter has been reported to be Rs. 396.69 crore compared to 142.72 crore in the corresponding quarter

last year. On per ton basis the freight rate comes to Rs. 536 per ton compared to Rs. 260.58 per ton in Q3FY10 signifying an increase of

106% increase in freight rate per ton on QoQ basis. Similarly for the full year FY10 the ocean freight reported has been Rs. 812.16 crore

compared to Rs. 303.71 crore in FY09 on consolidated basis.

Z However, for the quarter under review and for the full year the increase in inland transportation has not gone up significantly. Inland

transportation for Q4FY10 has been reported to be 241.67 crore compared to Rs. 201.49 crore in the corresponding quarter last year.

For the full year FY10 the cost for inland transportation came at Rs. 843.97 crore compared to 852.93 in FY09 signifying a decrease of

EUREKA RESEARCH 2

SESA GOA LTD.

22nd APRIL, 2010

www.eurekasecurities.com


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EUREKA RESEARCH 3

SESA GOA LTD.

22nd APRIL, 2010


1.05%. this has mainly happned because of the lower rate of railway freight charged by the railways last year. However, with the

economy stabilising and returning to growth trajectory, the Indian Railways has revised its distance based charge by levying an

additional charge of Rs 100 after hiking the distance based charge to Rs 300 per ton for iron ore traffic meant for exports, that is, forother than domestic consumption on manufacture of iron and steel and cement industry. As per the latest release by the Indian

Railways, the Central Government has sanctioned approval for increasing the existing distance based charge further by Rs 100. This

revision, which comes within a gap if two weeks, have been made effective from April 1, 2010 to April 30, 2010. With this revision the

distance based charge will now undergo a change. Thus for FY11 the company would have to shell out more on the inland

transportation cost.

Z Other expenditure for the quarter has been reported at Rs. 144.43 crore compared to Rs. 138.4 crore in the corresponding period last

year. For the full year other expenses has been reported at Rs. 438.43 crore compared to Rs. 306.66 crore in FY09. Other expenses has

gine down sequentially mainly because of the fact that last quarter there has been a forex loss of Rs. 118 crore, which is not there in

this quarter. However, the increase in demurage charges and royalty has largely contributed in other income being on the higher side.

Z The management reiterated their plans to augment iron ore production volume to the targeted level of around 50 Mt in next 2-3

years, of which 30 Mt is expected to come from Goa (20 Mt is expected to come from Sesa's Goa Operations, 10 mt from Dempo), 10

Mt from Karnataka and 10 Mt from Orissa

Z The strong performance by the company during the quarter and also for the full year has been attributed by the management to

mainly two things robust demand from China and a constant rise in iron ore of below 62% Fe content grade prices in the international

market. Currently 58% Fe content grade of iron ore prices are ruling at around $120 per ton.

Z In the current quarter the participation of iron ore traders have come down significantly, following the news that the Chinese

government has put restriction in importing iron ore of Fe content grade of below 62%. However, the management indicated that thecompany has not received any official communication in this regard and would wait for further clarification on the issue. The

shipment for the time being is strong and the management has indicated that they are booked to the extent of 50% for May 2010.

Z As per the management the company's exposure to traders buying less than 60% Fe grade ore is restricted to less than 25%. Rest of

the ore is sold to companies like Sino Steel, etc. directly and there has not been any shortfall of demand from these companies

witnessed as of now. Thus, the management tried to convey that company is not going to be impacted very severely going forward.

Z Though the company has clocked record volume growth, excluding Dempo Sesa Goa has produced only 17 million tonnes for the full

year which is only about 13% growth compared to the last year. This lower volume of sale and production has been attributed to

extended monsoon in Goa with the prevalence of cyclonic storm. In addition to this there has been issues with evacuating iron ore

from Orissa and Karnataka on account of procedural delays in obtaining clearances and permit from the government. In addition tothis there are delays that the company faced on account of issues relating to mineral policy in Goa. However, the company is working

constantly along with the industry body to work out these issues with the government.

Z The cost of purchase of ore has shown a significant increase during the quarter to 121 crore from 66 crore in Q3FY10. This has been

attributed by the management to the linkage of ore extracted from 3rd party mines to market price of the ore of the corresponding

grade. Most of the 3rd party mines operated by the company are located in Orissa, which produces ore of Fe 63.5% grade and the

curring price of such ore in the international market are in the vicinity of $175 per ton.

Z During the full FY 2010 spot to contract mix for the company has been 80% and 20%. The long term contract signed by the company

are for >60% Fe content grade.

Z While updating on the logistic side the management indicated that the railway siding in Orissa will be ready by 1st half of FY11 andKarnataka by FY11 end. The company expects to complete road corridor by 1st Quarter FY12.

Z The effective tax rate of the company is around 24%. The company has certain plants which enjoys EOU status, however such status is

Key Takeaway from the Concall


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going to end in FY10-11. Thus FY12 onward the company is going to experience an increase in effective tax rate.

Z The management has indicated that the company will be able to maintain 20-25% growth in volume YoY. For FY11 the company is

targeting an output of 30 million tonnes.

Z The royalty rates have increased significantly during FY10 as Advelorem royalty regime got implemented from 13th August 2009.

Currently the royalty cost is in the range of Rs. 80-90/ton compared to about Rs. 20/ton previously.

Z As at 31 March 2010, the Company had cash and cash equivalents of Rs. 6,952 crore, consisting of, Rs. 4,565 crores in debt mutual

funds and Rs. 2,354 crores in fixed deposits with banks.

Figures in Rs. Crore

Particulars

Sales / Income from operations

Less: Excise duty

Net sales

Less: Ocean freight

Net Sales after oceanic Freight

Other operating income

Expenditure

Change in stock and WIP

Consumption of raw materials

Staff cost

Consumption of stores

Inland transportation

Other services

Purchase of ore

Export duty

Other expenditure

Less: Costs / expenses recovered

Depreciation

Operating Profit

Other income

EBITDA

Profit before interest and tax

Interest

PBT

Provision for tax

Current tax

Fringe benefit tax

Deferred tax

Profit after tax

Minority interest

Net profit for the group

Operating profit margin

EBITDA Margin

PBT Margin

PAT Margin

Financials (Quarterly Performance)

StandaloneConsolidated

Q4FY10

2813.19

12.96

2800.23

396.69

2403.54

15.36

-63.89

88.1

44.7

68.6

241.67

123.2

162.07

121.48

144.43

-14.47

16.64

1486.37

129.06

1632.07

1615.43

22.65

1592.78

0

385.87

0

-8.2

1215.11

2.24

1212.87

53%

58%

57%

43%

Q4FY09

1584.43

11.81

1572.62

142.72

1429.9

13.64

47.41

64.29

25.01

54.55

201.49

85.81

96.32

-12.75

138.4

-10.49

15.03

738.47

56.7

810.2

795.17

0.74

794.43

0

245

0.04

1.03

548.36

0.72

547.64

47%

52%

51%

35%

YoY%

78%

10%

78%

178%

68%

13%

-235%

37%

79%

26%

20%

44%

68%

-1053%

4%

38%

11%

101%

13%

128%

101%

13%

103%

2961%

100%

57%

-100%

-896%

122%

211%

121%

13%

24%

Q4FY10

2123.37

0

2123.37

289.36

1834.01

24.73

-77.66

73.4

28.55

59.36

201.95

101.42

162.07

90.27

114.15

-17.27

15.72

1106.78

121.92

1244.42

1228.7

22.37

1206.33

0

254

0

-12

964.33

0

964.33

52%

59%

57%

45%

Q4FY09

1484.98

0

1484.98

142.7

1342.28

11.33

13.8

37.08

21.85

52.31

199.3

78.27

96.32

-12.07

148.17

-12.34

13.16

717.76

55.27

786.19

773.03

0.74

772.29

0

243

0.07

0.44

528.78

0

528.78

48%

53%

52%

36%

YoY%

43%

43%

103%

37%

118%

-663%

98%

31%

13%

1%

30%

68%

-848%

-23%

40%

19%

54%

121%

58%

59%

2923%

56%

5%

-100%

-2827%

82%

82%

8%

11%

9%

28%

EUREKA RESEARCH 4

SESA GOA LTD.

22nd APRIL, 2010



5/6

EUREKA RESEARCH 5

SESA GOA LTD.

22nd APRIL, 2010


# Calculated

We expect Sesa Goa to have the best year in FY11 as the expectation is that iron ore prices will likely double in CY2010 Q2, and are

expected to rise further in Q3and Q4. However, increasing domestic Chinese production of iron ore, possible increase in scrap

consumption with inevitable margin compression in the steel industry should put pressure on prices in subsequent periods. In addition

to this, Oversupply looms from 2012. A turnaround in iron ore prices could hit BHP Billiton, Vale, Rio Tinto and other miners furiously

digging for more supplies. The Current demand for 1.3 billion tonnes of iron ore produced annually suggests a deficit, according to official

Australian government forecasts. But that deficit could vanish if iron ore output matches growth forecasts of 50 percent more ore by

2015. Australia, the world's largest exporter of iron ore, expects to ramp up its annual shipments by 40 percent to 552 million tonnes over

the next five years. More than two dozen mines are proposed or under development in Australia, some of which could contribute

Conclusion

Particulars

Gross Sales **Excise Duty

Net Sales

Other Income

Total Income

Total Expenditure

PBIDT

Interest

PBDT

Depreciation

PBT

Tax

Profit After Tax

EPS (fully diluted)

Outstanding Shares

(assuming full FCCB Conversion)

P/E (Forward)

PBIDT Margin

PBDT Margin

PBT Margin

Effective Tax Rate

PAT Margin

FY14E

1348990

13400

430

13830

6871

6959

55

6904

155

6749

1721

5028

56.7

88.73

8.06

52%

52%

50%

26%

38%

FY13E

1208580

12004

430

12434

6178

6257

55

6202

160

6042

1541

4501

50.7

88.73

9.01

52%

52%

50%

26%

37%

FY12E

1174378

11665

430

12095

6009

6086

65

6021

154

5868

1496

4371

49.3

88.73

9.28

52%

52%

50%

26%

37%

FY11E

1128675

11211

430

11641

5783

5858

60

5798

86

5712

1336

4376

76.9

88.73

5.94

52%

52%

51%

23%

39%

FY10

6659.5544

6615

425.97

7096.42

3526

3571

51.72

3519

75

3445

806

2639

31.6

83.46

54%

53%

52%

23%

40%

FY09

5302.5973.18

5229.41

224.03

5486.84

2724.02

2763

0.99

2761.83

51.67

2710

715.27

1994.89

25.3

53%

53%

52%

26%

38%

FY08

3471.1555.93

3415.22

69.44

3508.44

1499.44

2009

0.03

2008.97

48.97

1960

653.82

1306.18

59%

59%

57%

33%

38%

Financial Annual (Consolidated) In Rs. Crore

Particulars

Iron ore Sales (in tons)

Average Realisation (full year)

Revenue from iron ore sale

Metallurgical Coke Sales (in tons) #


Revenue from Met Coke

Pig Iron sales (in tons)


Revenue from Pig Iron Sale

FY14

48000000

2500

12000

380800

14700

559.776

531250

17500

929.6875

FY13

41000000

2600

10660

364000

15960

580.944

468750

18000

843.75

FY12

38000000

2800

10640

273000

16380

447.174

328125

20000

656.25

FY11

27000000

3700

9990

266700

17600

469.392

292950

28225

826.8514

FY10

20500000

2556.6

5241.03

254000

15138.58

384.52

279000

19778.85

551.83

** Revenue Assumptions


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SESA GOA LTD.

22nd APRIL, 2010

hundreds of millions more tonnes to worldwide supply. All these developments would certainly create substantial downward pressure

on international iron ore prices.

In line with iron ore, metallurgical coal prices have also moved from annual to a quarterly basis. The settlement price of the coal for

CY2010 Q2 has got settled for USD200/t, but we now believe prices will increase to USD300/t by Q4. However, challenges to the

continuation of such high prices should come from increasing domestic Chinese production and slower domestic imports as has been

witnessed in the last couple of months. As such we expect coke prices to hover around $400/ton on an average for FY11. However, with

coking coal becoming concerntrated in the hand of a few producers, the prices are likely to remain on the higher side in the short to

medium term. However, we expect in the longer term technology evolution such as the FINEX Technolory of POSCO would reduce the

requirement of coal substantially. As such we expect the company to benefit significantly from the augmentation of its coke oven battery

in FY11, however going forward the prices are going to come down to more reasonable level.

At a current price of Rs. 457/ton the stock is trading at a forward P/Ex of 6, 9.28 and 9 based on FY11E, FY12E and FY13E EPS of Rs. 76.9,

Rs. 49.3 and Rs. 50.7 respectively. We expectc that from FY12 onward the iron ore realisation for the company to come down which

will be accompanied by higher effective tax rate and assuming the remaining 4245 FCCB gets converted the equity base for the

company would go up to 88.73 crore, the EPS is likey to come down significantly, in view of this we recommend Hold on the stock but

advise to sell if the price cross Rs. 515-520/share.

Valuation & Recommendation

EUREKA RESEARCH 6 www.eurekasecurities.com

Registered Office :

Corporate Office :

Mumbai Office :

7 Lyons Range, 2nd Floor, Room No. 1, Kolkata - 700001

B3/4, Gillander House, 8 N S Road, 3rd Floor, Kolkata - 700001Phone : 91-33-2210 7500 / 01 / 02, Fax: 91-33-2210 5184

e: [email protected]

909 Raheja Chamber, 213 Nariman Point, Mumbai-400021Phone : 91-22-2202 5941 / 5942e: [email protected]

DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, butwe do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute ourjudgement as of this date and are subject to change without notice. Eureka Researchwill not be responsible for the consequenceof reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID.

Analyst : Kinshuk Acharya

Email : [email protected]

Phone : 91-33-3918 0386 - 87

sesa goa -q4fy10

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