STRONG FUNDAMENTALS - Sesa Goa Ltd.

Sesa Goa Ltd.

Day’s Close – Rs. 81.65
52 Wk high – Rs. 219
52 Wk Low – Rs. 60
No. of shares – 78,72,40, 400
Promoter Holding – 51.18%
Market Cap – 6427.82 Cr
Book Value - Rs. 35.45
EPS – Rs. 28.20 (TTM)
PE – 2.9
Company has 4 times issued bonuses in the ratio 1:1.
Total Share Capital - 39.36
Net Worth - 2791.13
Total Debt - 0.00
Net Block - 398.09
Investments - 2000.44
Net Current Assets - 376.75
Total Assets - 2791.13

All the above fig are as on 23-Feb-2009.

Business overview:
Sesa Goa, a 51 per cent subsidiary of Vedanta Resources, is engaged in the mining and export of iron ore. The company has three segments — iron ore (84 per cent of FY08 revenues), pig iron (13 per cent) and metallurgical coke (3 per cent).

Sesa Goa has the current capacity to produce 12 million tonnes per annum (MTPA) of iron ore, which it plans to increase to 25 MTPA by 2010 through an investment of $700 million. The company has sufficient internal resources to fund this expansion.

To augment its existing capacity, Sesa Goa has been aggressively exploring acquisition of new mines in Goa and Karnataka.
The relatively lower and medium grade iron ore from Sesa Goa has been in high demand over the past few years, as the Chinese steel mills imported larger quantities of low grades ores.
This and the freight cost advantages that Indian exporters have over the Brazilian counterparts, had contributed to rising Chinese off take of Indian ore.

With net sales registering a Compounded Annual Growth Rate (CAGR) of 55 per cent and net profit growing by 159 per cent, Sesa Goa’s earnings and cash flows have expanded at a rapid pace over the past five years. This period has also seen operating profit margins improve from 25.6 per cent to 63.3 per cent, superior to global peers as BHP Billiton and Vale. Strong cash flows have resulted in a zero-debt status for the company.
recording sharp year-on-year falls from October 2008.
Iron ore spot prices also corrected from $190 in May to $ 63 in October 2008. While China’s 4 trillion Yuan ($586 billion) bail-out package is expected to revive demand for steel and, thus, iron ore, the jury is still out on whether overall Chinese import volumes will be maintained at last year’s levels of about 400 million tonnes.
But the past two months have brought signs of a drawdown in Chinese stockpiles and better export offtake of iron ore, especially for Indian exporters. Export volumes of iron ore from India staged a sharp year-on-year increase of 38 per cent and 21 per cent respectively in December and January.
Expectations of higher Chinese demand have propped up spot prices for iron ore by about 30 per cent from $63 to $ 85 a tonne in recent months.

Financial Overview:
Offtake has not been a key problem for Sesa Goa in recent years, with the company managing a 25-30 per cent volume growth every year since 2004-05.
In the current fiscal, Sesa Goa witnessed a volume decline in the September quarter to the tune of 30 per cent on a complete cutback in Chinese demand, but volumes recovered, increasing by 37 per cent in the December quarter. Sales for the last quarter were up by 23 per cent on a Y-o-Y basis, despite the economic slowdown.
Volume growth from the iron ore segment was at 36 per cent year on year and 37 per cent. Sales are up by 76 per cent and net profits by 69 per cent in the nine months ended December 2008.
Steadily rising iron ore realizations have helped Sesa Goa steadily improve its operating profit margins over the years to nearly 48 per cent in the first nine months of 2008-09; though margins have moderated in the December quarter.
A low cost structure and zero financing costs, endows the company with a cost advantage amongst its competitors globally. Vedanta Resources Plc (the 51 per cent holding company) had earlier announced plans for an eight-fold increase in the iron ore production capacity at Sesa Goa.
While this expansion project will certainly add scale over the long term, whether it will be implemented in its entirety, given a softer demand scenario, needs to be seen. This plan has the potential to increase the debt on the balance-sheet. Strong operational performance in recent years has left Sesa Goa with high return ratios (return on capital employed of over a 100 per cent), a strong balance-sheet, with high free reserves and near zero debt. With commodity prices set to fall further, the company has hinted at more room for downsizing costs.
Recent export duty concessions extended by the Indian Government will also translate into better realizations in the coming quarters. The easing off of inflation may see lower policy intervention on ore exports; this has been a key source of risk to earnings last year.
Valuations:
The key risks to Sesa Goa’s earnings arise from a sharper-than-expected cut in iron ore prices (contract as well as spot), slippage in Chinese demand and a spike in freight rates.
Volumes and defending its market share being the foremost priority, Sesa Goa may have to work with thinner margins than in the immediate past, for the near term.
A key trigger to the stock price would be the conclusion of iron ore negotiations with China, at the expected prices.

SESA GOA LIMITED Five Year Record as on 31 March 2008
(Rs. in Crores)
Year ending 31 March 2004 2005 2006 2007 2008
Total Revenue 573 1424 1735 2049 3672
Earnings 99 462 539 606 1492
EPS (in Rs.) 50.19 117.47 137.04 154.06 379.06
Dividend % 100% 225%* 400% 400% 450%
Net Worth (Net of Intangible Assets) 313 724 1084 1506 2791
Fixed Assets 195 288 329 399 414
* On expanded capital base