Sesa Goa Ltd.

CMP Rs.3,020, Buy, Target Price Rs.4,960

Sesa Goa Limited is one of India's largest exporters of iron ore in the private sector. For the past five decades, the Company has been involved in iron ore mining, beneficiation and exports, with a consolidated turnover of around Rs. 38,000 mn in FY08. Over the last decade, it has diversified into the manufacture of pig iron and metallurgical coke. It operates with a 1.3% market share of the overall sea-borne trade of iron ore in the world, and is a zero-debt company with a large cash reserve.

INVESTMENT RATIONALE

Substantial rise in contract prices in FY09 amid soaring demand for iron ore.
Capacity expected to double in next 3 years: Strategic Stake with Vedanta Resources, to leverage their mining abilities and boost de-bottlenecking programs.
Mineral Policy likely to increase FDI in the minerals and mining space.
EBIDTA per tonne to increase even after the imposition of Export Duty & the possible increase in Royalty.
Excellent FY08 results… aided by increased spot sales.

OUTLOOK & VALUATION

We believe the demand for iron ore will continue to remain strong in the short to medium term on the back of increasing global steel production led by China & India. Going by the current trend, the crude steel production in China is likely to grow by about 15%, touching the level of around 480 MT. On the back of buoyancy in demand, the international benchmark iron ore prices have gone up significantly in the recent times, and we expect them to stabilize at current levels (US$110 for FE content < 62%) in the medium term.

Average per tonne iron ore realization for the Company at the EBITDA level was US$44 in FY08. The Government recently increased the export duty on iron ore to 15% Ad-valorem from a specific duty of Rs. 50 (for low FE content) & Rs. 300 (for High FE content). Moreover, we believe that the Government could also increase the royalty rates on the iron ore mining to about 10%. Despite of these increased costs, we expect Sesa Goa's per tonne realization at the EBIDTA level to remain at a healthy US$44, during FY08 to FY2010.

At the current market price of Rs. 3,020, the stock is trading at a P/E multiple of 5.5x & 6.0x its FY09E & FY10E earnings respectively. We believe the Company is set to perform exceedingly well over the next few years on the back of increasing production & higher iron ore prices. We initiate our coverage on the stock with a 'BUY' rating and a target price of Rs. 4,96 0 (considering a P/E multiple of 9x for FY10E).