Sesa Goa >> 'buy'

Motilal assigns 'buy' to Sesa Goa
21 Feb, 2008, 1638 hrs IST, INDIATIMES NEWS NETWORK

MUMBAI: Motilal Oswal has initiated coverage on Sesa Goa with a ‘buy’ and set a target price for Rs 4,677 for the stock. Global iron ore prices have been trending up over the last few years. Given the strong demand from China and lagging supplies from the three consolidated global miners, the brokerage expects iron ore prices to continue moving up. Sesa Goa is India’s largest private iron ore miner, with reserves of over 207 million tonne. It is aggressively ramping up production to capitalise on the rising price trend.

Increasing global steel production has also been driving up demand for coke. China, a dominant exporter of coke, increased the export duty on coke from 15 per cent to 25 per cent in January 2008. As a result, prices of coke have increased to an all-time high. Sesa Goa imports coking coal for the manufacture of coke. While its cost of coking coal is fixed through long-term contracts, it sells coke at spot prices. Strong coke prices would, therefore, drive up margins, says Motilal.

Operating costs are low as two-thirds of Sesa Goa’s mining operations are located in Goa, in close proximity to the seaport. Ore is transported in barges through rivers to its trans-shipper for loading on outgoing ships. The company has deployed its own railway wagons in Orissa to minimise inland transportation costs.

The stock is trading at 7.1x FY09E EPS and an EV of 3.8x FY09E EBITDA. Sesa Goa has surplus cash of Rs 1,600 crore (Rs 406 per share, based on March 2008 estimate). Motilal has initiated coverage with a target price of Rs 4,677 (EV/EBITDA of 6.5x FY09E). Earnings CAGR of 37 per cent over FY07-10 would drive a re-rating.