The Indian stock markets have rallied an incredible 62% in FY04 to date. And during this period, there are various sectors and stocks that have put the index gains to shame by gaining anything from 100% to 1,000%! Refineries, banking, aluminium, steel, pharma, etc. are just some of the sectors that have outperformed the benchmark indices by a huge margin. However, in this article, we take a look at Sesa Goa, which is an iron ore mining company. Iron ore is used in the production of steel and being in a steel related sector, the stock has attracted tremendous attention on the bourses in the recent past. We take a brief look at the company.
The chart above shows the movement of the stock price of Sesa Goa vis-a-vis the BSE-Sensex for the current fiscal to date. The stock price has outperformed the index by an enormous margin. To put things in perspective, Rs 100 invested in the Sensex at the beginning of the current fiscal would have yielded an absolute return of 62% (Rs 162) as on November 27, 2003. However, a similar amount invested in the Sesa Goa stock would have appreciated to Rs 688!
Now let us look at the company in brief.
Sesa Goa Ltd., the flagship company of the Sesa Group, is India's largest private sector exporter of iron ore. Over the last decade, the company has also diversified into the manufacturing of pig iron and metallurgical coke. It also has a presence into shipping, shipbuilding and engineering. A major part of the iron ore produced by the company is exported and it currently accounts for 1.5% of the world trade in iron ore and is amongst the lowest cost iron ore mining company.
Sesa Goa had three subsidiaries i.e. A. Narrain Mines Ltd., Sesa Industries Ltd. (pig iron) and Sesa Kamble Coke Company Ltd. (metallurgical coke). However, with effect from FY03, the company's 100% subsidiary, A. Narrain Mines has been amalgamated with the parent.
For 1HFY04, the company registered a profit of Rs 106 m as compared to a loss of Rs 3 m in the corresponding period last year. The topline of the company increased by 83% in the first half of the current fiscal. The above improvements have come on the back of improved iron ore prices during the period under consideration. However, the company's 1HFY04 results are not comparable to that of the previous year owing to the amalgamation with its subsidiary.
The company's fortunes are dependant on the fate of the iron and steel industry, as the main use of iron ore is in the production of steel. The company's export markets include Japan, China, Pakistan and parts of Europe. Though China has huge iron ore reserves, it is primarily of lower grade and hence the country imports huge amounts of higher-grade iron ore from countries like India.
The prospects of the company's exports to China look good in the wake of increased Chinese steel production and consumption. Iron ore prices have also displayed strength, which is likely to continue in the near future. Also, prices of pig iron and coke are ruling firm as compared to the previous year. It must be noted here that substantial amount of ore imports by China has led to the firming up of freight rates in recent times. However, the hardening of freight rates is beneficial for Indian companies like Sesa Goa, as imports of iron ore by China from Brazil, another sourcing destination, has become unmanageable owing to strong upsurge in freight rates.
Looking at the weaker side of the company, Japan being the largest importer of iron ore from India, has the power to negotiate the prices of iron ore. Hence, the company's strength to that extent is reduced in terms of exports to Japan. Moreover, since iron ore exports form the major source of revenue for the company, the freight rates also have a role to play in deciding the profitability of the company. Also, the exchange rates volatility directly affects the earnings of the company. At Rs 448, the stock is trading at a P/E multiple of 42x its 1HFY04 annualised earnings.