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Sesa Goa: Volume expansion to drive growth

Sesa Goa was founded as Scambi Economici S.A. Goa in 1954 by Baron Ludovic Toeplitz. In 1955 the company was jointly acquired by Eugene Plotzki and Ferromin S.p.A. of Italy (a subsidiary of Finsider International). Finsider International acquired another company, Mingoa Sociedade Minieral Goesa S.a.r.l in 1957 and merged it with Sesa Goa to form a single company Sesa Goa pvt.ltd in 1979. The company went public in 1981.

 

Stock data (15 Oct 2009)

BSE

Share Price

345.6

No. Of Shares (Million Nos.)

836.0

Market Cap (Rs million)

288,879.8

52 week high/low (Rs)

344.4/60.0

Average Volume (6month)

62,481,255.0

Source: BSE

 

Starting with iron mining, the company ventured into barge construction in 1984 and developed it into a shipbuilding division since then. The company also diversified into the manufacturing of pig iron and metallurgical coke over the last decade. The company has mining operations in Goa, Orissa and Karnataka and exports iron ore, lumps and fines to Japan, China, Europe, Pakistan and Korea. Now Sesa Goa is India's largest private sector iron ore producer and exporter, with mining and processing facilities at various locations in India. It currently has access to 240 million metric tons (MT) reserves and resources of iron ore.

 

Shareholding Pattern

 

The shareholding pattern of the company as on 30th June 2009 is shown in the chart. In the promoter group, Finsider International Co. holds 51% equity shares in the company. Finsider International was fully acquired by Vedanta Resources from Mitsui & Co. in 2007. Vedanta Resources plc is a London listed diversified metals and mining group. Its principal operations are located throughout India, with other operations in Zambia and Australia.

 

 

Key Milestones

 

The key milestones achieved by the company are given in the table below:

 

Timeline

Milestone / Event

2005-2009

- Acquires outstanding shares of VS Dempo & Co along with 100% equity shares of Dempo Mining Corporation and 50% equity shares of Goa Maritime

- Records highest profit in FY07 and declares a dividend of 400%

- Vedanta Resources acquires 51% controlling stake in Finsider International from Mitsui & Co.

- Iron ore sales volume crosses 15m tonnes in 2008 - 09

2000-2004

- Completes 50 years of operations

- Shipbuilding Division builds its 62nd vessel, a 2200T barge for its own fleet

- Compact charging system for coke plant is being commissioned

- Bags a 5 year contract from Pakistan Steels for supply of iron ore of 1.17 MT p.a.

- Iron ore sales crosses 8.5 million MT in 2003-04

- Becomes the first business of its kind to be certified with OHSAS 18001

- Commissions a new process plant for its mining operations at Orissa

1995-1999

- Acquires 100% shares of A Narrain Mines Limited having mining operations in Karnataka

- Commences mining operations at Barbil in Orissa

- Karnataka mining developments commence

- MITSUI & Co of Japan, through Earlyguard, UK, buys Finsider International with its 51% equity in Sesa Goa.

- 84 coke ovens are commissioned in April 1995

- Sesa Shipping is launched in January with the acquisition of Transhipper M.V. ORISSA

1990-1994

- Second blast furnace is commissioned in 1994

- Starts manufacturing low ash metallurgical coke

- First phase of 150,000 tons per yer Pig Iron Plant is commissioned and manufacture of low phosphorous foundry grade pig iron starts

1981-1988

- Enters into a technical collaboration with Vaagen Verft, Norway, to manufacture fishing trawlers

- Starts a barge construction unit at Sirsaim which has since developed into the Shipbuilding Division

- Goes public with 60% public shareholding and 40% held by Finsider International (later became ILVA INTERNATIONAL)

1954-1979

- Sesa Goa Private Limited, is formed with amalgamation of Sesa Goa and Mingoa fully owned by Finsider International

- Finsider International acquires the West German interest in Sesa Goa Limitada and also all the shares of Mingoa

- Finsider International acquires Mingoa Sociedade Minieral Goesa S.a.r.l.

- Company renamed Sesa Goa Limitada is bought over jointly by Eugene Plotzki and Ferromin S.p.A. of Italy (Subsidiary of Finsider International)

- Founded as Scambi Economici S.A. Goa in 1954

Source: Company

 

Financial performance

 

The company's revenue and net profit have grown at a CAGR of 42.0% and 63.9% respectively over the last five years. A key growth driver has been the company's ability to acquire new mines and increase production from existing mines at Goa and Karnataka, duly supported by well managed logistic activity. The company has surpassed all past records in terms of tonnages handled at mines and by trans-shipper vessel MV Orissa. The company's iron ore sales volume has increased at a CAGR of 13.8% over the last five years. This coupled with the rising steel demand driven by growing investment in infrastructure, need for new housing and increasing levels of urbanization in Asian countries, particularly China and India has supported the company's growth plan.

 

Particulars

2004

2005

2006

2007

2008

2009

Revenues (Rs. Mn)

8,970.0

15,440.0

18,740.0

22,630.0

38,970.0

51,831.3

EBITDA (Rs. Mn)

2,915.3

7,560.6

8,919.7

10,079.4

23,776.5

27,661.0

PAT (Rs. Mn)

1,684.5

4,764.2

5,748.5

6,510.1

15,490.0

19,948.9

EBITDA (%)

32.5

49.0

47.6

44.5

61.0

53.4

PAT (%)

18.8

30.9

30.7

28.8

39.7

38.5

ROCE (%)

55.5

92.9

74.5

60.2

79.1

57.5

ROE (%)

44.1

63.0

50.1

40.5

52.6

42.3

Debt-Equity (x)

0.2

0.0

0.0

0.0

0.0

0.0

Shares in Issue (Mn)

196.8

393.6

393.6

393.6

393.6

787.2

EPS (Basic) Rs.

8.6

12.1

14.6

16.5

39.4

25.3

Source: Company

 

Fund raising for expansion to boost earnings: The company plans to raise Rs.60bn through various issue of FCCBs, Qualified Institutional Placements, American depository receipts (ADR), Global depository receipts (GDR) and other financial instruments. These proceeds will be used for expansion of mining operations, exploration of new resources, and to further develop its pig iron and metallurgical coke operations. With this the company's iron ore production is expected to increase to 17-18m tones by end of FY10 and 25m tones by end of FY11. The company plans to increase iron ore production to 50m tones by 2012-13 and for this it plans both organic and inorganic expansion.

 

Dempo's acquisition to boost volumes: The company acquired Goa based mining company V. S. Dempo & Co and its subsidiary Dempo Mining Corp for Rs.17.5bn in June 2009. This acquisition was financed by internal accrual and brought along a working capital of Rs.1450m. Dempo is one of Goa's largest iron ore producers with mineable reserves and resources estimated at 70m tones. This increases Sesa Goa's mining reserve by 70m tones. The Dempo acquisition is expected to yield positive result during FY10 and contribute to nearly 4-5m tones of sales volume. Also since 40% of Dempo's export contracts are based on fixed price, it will help Sesa Goa to increase its share of contract sales and therefore lessen the effect of weak iron ore prices in the world market.

 

Recovery in the demand for iron ore: China, the world's biggest iron ore importer, imported 64.6m tones in September, an all time high. This was 30% and 11% higher as compared to August and July respectively. According to World Steel Association, global steel consumption is expected to rebound by 9% in 2010 after an 8.6% decline this year. The recovery in iron ore demand from China and improvement in steel production world over should boost the spot prices of iron ore. This should benefit the company as it exports more than 80% to China and also improve the average realization rate.

 

Results Update - Q1FY10 (Consolidated)

 

Sesa Goa's revenue declined by 21%YoY during Q1FY10 and EBITDA by 43.7% mainly on account of lower iron ore sales realization which declined by 52.7%YoY and higher cost of production. Total expenses as percentage of sales increased to 55% in Q1Fy10 as compared to 37% in Q1FY09. The iron ore sales volume however increased by 44.6%YoY. The Q1FY10 result includes Dempo's financial result which reported sales and PAT of Rs.1600m and Rs.6400m respectively.

 

Particulars

Q4FY09

Q1FY10

Q1FY09

Revenue (Rs. Mn)

14,299

10,115

12,800

EBITDA (Rs. Mn)

7,399

4,531

8,051

PAT (Rs. Mn)

5,480

4,241

6,360

EBITDA Margin (%)

51.7

44.8

62.9

PAT Margin (%)

38.3

41.9

49.7

EPS (Rs )

7.0

5.1

7.6

Source: Company

 

Future Plans

 

The company plans to spend Rs.6.05bn (US$ 125 million) for increasing the capacity of pig iron plant by 3,75,000 MTPA along with expansion of met coke plant and setting up of waste heat recovery power plant.

 

SWOT Analysis

 

Strengths

Weaknesses

· India's largest private sector exporter of iron ore

· Highly profitable and debt free company

· Strong cash position

· Large dependence on the Chinese iron ore market

Opportunities

Threats

· From a world market share of 17% in 2001, China now accounts for 40.9% of crude steel. Also its industry has been the fastest to recover from the fall in demand in the middle of 2008. Sesa Goa has a geographic advantage being closer to China and has the right quality of medium and low grade ores to feed Chinese mills.

· Global downturn affecting the steel industry and therefore subdued demand for iron ore

· High dependency on exports, exposed significantly to exchange rate "fluctuations.

· The continuous delays by the state governments and GoI in the allocation of mines or the adoption of a favourable policy towards allocation of captive iron ore mines to steel manufacturers could affect the mining and production plans of Sesa Goa

· Sea-borne iron ore trade is concentrated in a few hands; Vale, Rio Tinto and BHP Billiton; together accounting for over 70% of the global sea-borne iron ore trade. Their scale allows them to affect competition

 

Valuation and recommendation

 

The company's volume is expected to increase by over 35% in FY10 with the recovery in the demand of iron ore coupled with the company's plan to expand operations and acquisition of mining assets. The substantial increase in volume will help in offsetting the effect of decline in average realization rate. I expect revenue to grow at a CAGR of 13.9% over the next two financial years.

 

 Particulars

2009

2010

2011

Revenues (Rs. Mn)

51,831.3

57,014

67,277

EBITDA (Rs. Mn)

27,661.0

27,938

29,334

PAT (Rs. Mn)

19,948.9

20,148

21,156

EBITDA (%)

53.4

49.0

43.6

PAT (%)

38.5

35.3

31.4

EPS (Rs)

25.3

24.1

25.3

Shares in Issue (Mn)

787.2

836.0

836.0

P/E* (x)

13.6

14.3

13.7

Source: Company/Analyst Estimate

Company

EPS TTM

P/E

Price

Sesa Goa

20.9

16.6

345.6

Guj NRE Coke

0.4

192.9

67.5

Hind.Copper

(0.5)

(407.4)

207.8

Hind.Zinc

61.5

14.1

865.7

NMDC

10.5

32.8

344.3

Sterlite Inds.

11.79

73.6

868.1

GMDC

7.7

14.5

111.7

At a current market price of Rs.345.6, the company is trading at 17.3 times its FY10 estimated earnings and 13.7 times its FY11 estimated earnings. The Sesa stock is attractively valued as compared to selected peer stocks. I recommend a `BUY' on the stock.