Sesa Goa’s performance for the September quarter was marred by lower volumes on the back of Karnataka iron ore mining ban. Profitability was further affected by rising raw material costs and foreign exchange (forex) losses due to the rupee’s depreciation. Moving forward, concerns on volumes remain. However, softening of iron ore prices, volatile currency movement and implementation of mining bill in its current form, are some of the other factors that could dent the company’s profitability.
The stock has corrected almost 40 per cent in last one year; it has slipped by about two per cent after the results were declared on October 25. Though most concerns seem factored in thereby limiting downside, triggers for any upside too remain missing. Most analysts are, thus, neutral on the stock, awaiting uncertainties on above mentioned issues to be cleared.
Q2: VOLUMES DIP
The impact of the Karnataka iron ore mining ban was clearly visible on Sesa Goa’s September quarter performance. Its total iron ore production for the quarter (1.12 million tonnes) dropped to less than half of 2.88 million tonnes (mt) seen in September 2010 quarter. However, planned reduction of inventories enabled Sesa to report sales of 1.55 mt in the quarter (0.71 mt sold from Karnataka inventories and 0.83 mt from Goa inventories estimate analysts), restricting the decline in sale volumes to 15 per cent year-on-year. The decline, however, is phenomenal compared to sales of 4.78 mt in the June quarter.
| UNDER PRESSURE | ||
| In Rs crore | Q2’ FY11 | FY12E |
| Net sales | 789.7 | 7787.9 |
| Y-o-Y chg (%) | -14.0 | -15.4 |
| Ebitda | 25.9 | 3184.8 |
| Y-o-Y chg (%) | -23.5 | -38.8 |
| Net profit | 1.3 | 2100.0 |
| Y-o-Y chg (%) | -99.7 | -50.1 |
| EPS (Rs) | 0.0 | 24.2 |
| PE (x) | NA | |
On the flip side, per-tonne realisations at Rs 3,847.2 (though lower than estimates of Rs 3,996) was higher than Rs 3,528 in the year-ago period. Thus, revenues during the quarter fell 14 per cent year-on-year. At the operating level, Sesa Goa felt the heat of rising raw material price and rupee depreciation. Raw material costs increased 69 per cent year-on-year to Rs 150.7 crore. Positively, higher other income of Rs 50.4 crore helped Sesa stay in the green.
CONCERNS REMAIN
Volumes remain a cause of concern, as there is uncertainty on the resumption of mining in Karnataka, analysts reckon. The company, however, feels it can regain normalcy by the December quarter, as mine inspections have already been completed. It has guided for a production of 2 mt from Karnataka during the March quarter and overall production to be either flattish on earlier guidance of 18.1 mt for the financial year 2011-12, or slightly higher, depending on the situation in Karnataka.
What concerns more is that mining irregularity issues in Karnataka has led to mining in other states to come under a scanner. In Goa, mining activities are being scanned by the Shah Committee. Major chunk of Sesa’s iron-ore production comes from Goa, with Karnataka contributing around one-third. Analysts at Emkay feel that Goa could be a spoil sport, as issues related to illegal mining and export of iron ore are under comprehensive investigation by the Shah Committee. While reports indicate, authorities are clearing select mining operations in Karnataka, there are fears that stringent restrictions on iron ore exports from Goa could be introduced, all of which need to be monitored.
OUTLOOK
Softening of iron-ore prices can also impact realisations. Reports indicate spot realisations for Sesa Goa’s ore grade have dropped 33 per cent in October to $90 a tonne against $130 during September. In this backdrop, analysts have revised their earnings estimates. Jigar Mistry, analyst at HSBC, has tweaked his FY12 estimates while keeping FY13, estimates unchanged as he expects the situation to normalise once legal mines are allowed to operate.
Emkay analysts feel, apart from mining issues in Goa and Karnataka, developments on the Mining Bill as well as proposals on export duty increase need to be watched. They add, Sesa Goa does not see the Mines and Minerals Development & Regulation Bill getting adopted in its current form, while representations are being made to regulatory bodies on export duty hikes.