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Sesa Goa Ltd: A brief overview - Views on News from Equitymaster
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Sesa Goa Ltd: A brief overview
Jan 10, 2007

Overview: Sesa Goa is a 51% owned subsidiary of Mitsui, Japan and is India's largest private sector exporter of iron ore. Currently, the company exports approximately 5 million tonnes (MT) of iron ore, fines and lumps to Japan, China and Europe from ports on both the east and west coasts of India. Besides mining activities in Goa, the company has mining operations in Karnataka and Orissa. Ore from Karnataka is exported through the ports at Goa and Chennai, while ore from Orissa is exported through the ports of Haldia and Paradeep. The company’s primary business is iron ore mining and exports, however it is also engaged in the production of metallurgical coke and pig iron. The iron ore business segment contributes almost 80% to the total revenues of the company. Iron ore is mainly used in production of steel through the blast furnace route. The demand for iron ore is expected to increase on account of the growth envisaged in the steel sector. In FY06, the company sold about 9.6 m tonnes of iron ore, out of which only 6% was for domestic sales and the balance 94% was exported. Out of the total 9 MT exports, exports to china accounted for 61%. China will continue to be the key end user market on account of its huge steel consumption and lack of sufficient iron ore supplies. Moreover, the company is strategically located near ports (water transport- the cheapest mode of transport). The company uses jetties to transport ore from the mine sites to ports. The company has participated in the Wagon Investment Scheme of railway, as uncertainty with regards to availability of railway capacity and the high tariff structure is one of the reasons of increasing cost pressures, to reduce costs. The company is expected to continue to witness higher realisations, as demand is likely to exceed supply. The other reason for higher prices is the increase in long-term contract prices.

On the flip side, the company is highly dependent on transport infrastructure, which remains rather inadequate. Various state governments are also following the policy of alloting mining leases only to the companies who would do value addition in the respective states. The slow pace of clearances for prospecting new mines by the government may also restrict its growth.

Over the last 3 Years: The company’s net sales have grown at a CAGR of almost 68% over the past 3 years while the expenses have increased at CAGR of 41% during the same period. During FY06, the company’s net sales have increased by almost 21% YoY on account of 72% increase in the international benchmark price of iron ore. The operating margins of the company were impacted in FY06 on account of domestic inflation fuelled by higher oil price, periodic increase of railway freight and lower exchange rate. To reduce its costs and dependence on rail rakes, the company has recently acquired rakes (investment made to own wagons) under `Wagon Investment Scheme’ of Indian Railways. Though operating margins were impacted during FY06, operating profits grew by 13% YoY in FY06 and in the past 3 years the CAGR has been almost 186% on account of the buoyancy in the steel sector (key end user industry of iron ore) and continuous efforts to control costs. The net profits of the company increased at CAGR of 247% in past 3 years. The company is almost a zero debt company and has consistently lowered its gearing by repaying debt. Though the other two business segments have not fared well in recent past, they are expected to do well in the coming years. The demand for coke and pig iron is expected to increase on account of growth in the steel industry. The prices of coke and pig iron are firming up as demand from end user industries like steel and automobiles increase.

The company is a zero debt company with a clean balance sheet. In FY05, the company’s sales leapfrogged on account of growth in exports (increased by 21% YoY) and higher realisations owing to better prices (prices increased by almost 19% YoY). The net margin expansion was achieved on account of better realisations and lower interest outgo costs. However in FY06, margins were tad lower compared to FY05 on account of rising input costs. Return ratios like ROCE and ROE really shot up in FY05 as higher volume and realisation benefits kicked in.

Particulars FY04 FY05 FY06
Sales (Rs m) 5,671 14,094 16,988
% growth 59.4% 148.5% 20.5%
OPM (%) 28.2% 50.0% 46.8%
Net profit Margin (%) 17.4% 32.8% 31.3%
Financial Ratios
Debt/Equity 0.20 0.01 -
Interest Coverage ratio 23.8 132.7 248.5
Return Ratios
ROE 31.6% 63.9% 49.0%
ROCE 27.2% 63.2% 48.9%
Valuations
P/BV     6.2
EV/EBITDA     7.8

To conclude…

At current valuations, the stock is trading at a multiple of 13 times its trailing twelve-month earnings. Going forward, while volume growth may not be a problem, it has to be borne in mind that the earnings is more a function of price than volumes, which especially at current high levels, is prone to increased volatility. Further, infrastructure bottlenecks are likely to hamper exports thus putting a question mark over growth in volumes. Some regulatory issues have also cropped up, which is preventing the company to augment its reserves. Taking into account these factors, we believe the risk behind taking position at current levels seems to be on the higher side.

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