Not much seems to be going in Sesa Goa's favour these days. The company received a fresh blow, with the government deciding to raise export duty on iron ore lumps and fines from 20 to 30 per cent. Sesa Goa has already been grappling with volume constraints due to the Karnataka ban and mining in Goa coming under a scanner. The second duty raise in calendar year 2011 has the potential to make Indian exporters lose further ground to global competitors.
The decision could not have come at a worse time, as Chinese demand is slowing and global iron ore prices are on a decline. Thus, analysts are further cutting earnings estimates for it, whose stock price at Rs 162 has halved from the January 2011 high of Rs 346.
Exports will reduce
In Budget 2011-12, the government had raised export duty on fines and lumps from 15 and five per cent, respectively, to 20 per cent, which has increased to 30 per cent from this month. The aggressive Braz-ilian and Australian iron ore giants such as Vale, BHP Billiton and Rio Tinto may pose a severe threat in the key Chinese market, where demand is anyway falling. Global ore prices have also corrected 25 per cent since September to $120-130 a tonne. For Sesa Goa, it will be a serious problem, as it exports 90 per cent of its produce (majority to China).
| MARGINS UNDER PRESSURE | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Revenue | 9,145 | 8,500 | 9,500 |
| Y-o-Y change (%) | 57.6 | -7.05 | 11.76 |
| Ebitda | 5,095 | 3,867 | 3,910 |
| Ebitda (%) | 55.71 | 45.49 | 41.16 |
| Net profit | 4,222 | 3,106 | 3,456 |
| Y-o-Y change (%) | 60.60 | -26.44 | 11.26 |
| EPS (Rs) | 49.17 | 35.15 | 39.23 |
| PE (x) | 3.38 | 4.73 | 4.23 |
| E: Estimates Source- CapitaLine, Bloomberg, Analyst reports | |||
The earlier duty raise had cost exporters dear. Coupled with the Karnataka iron ore mining ban imposed by the Supreme Court, exports declined 25 per cent to 35.4 million tonne y-o-y during April-October. In November 2011, exports fell 44 per cent. Analysts at Deutsche Bank believe the trend of year-on-year decline should continue to manifest in the ensuing quarters. They add the onus of the policy risk in India continues to weigh against exports, though a total ban is unlikely, given the adverse social implications.
Sesa Goa has annual mining capacity of six million tonne (mt) in Karnataka and 15 mt in Goa. With the ban in Karnataka, it can only export its Goa output. However, mining in Goa remains under the scanner and the state Lokayukta is yet to come out with a report, which indicates some risk. Analysts at ICICI Securities remain cautious because of the coming MB Shah commission's report. They add the environment impact assessment report on Bellary suggests revival could take as long as two years. Even as iron prices plummeted in Q3 FY12, the rupee depreciation provides some solace to exporters like Sesa Goa. Analysts at Nirmal Bang expect a 13 per cent fall in rupee realisations, compared to a 27 per cent drop in dollar realisations.
Outlook
In the current scenario, it appears exports from Goa may still continue, but this ore is low grade, and Indian steel makers are not ready buyers. More, transportation costs from Goa will also be high. Nomura analysts add that even after the current duty raise, Sesa Goa's margin will remain in the 25-30 per cent range on exports from Goa. However, Angel Broking's Bhavesh Chauhan says, "At current ore prices and after the duty raise, exports from Karnataka will fetch similar margins to what selling in domestic market will."
Overall, investors need to remain cautious on the stock till there is clarity from the Goa Lokayukta report and the M B Shah commission report. If Karnataka mining issues are resolved earlier than expected or if ore prices start rising, the stock will get a boost.
