Brokerages turn cautious on Sesa Goa; cut target price, EPS targets

NEW DELHI: Sesa Goa is constantly reeling under pressure since the month of February 2012 and has corrected over 25 per cent till date weighed down by mining bans and slowdown in iron ore demand.

Fresh blow to the stock came after the Goa State Government ordered the temporary suspension of mining operations in the state which accounts for over 90% of the ore the miner produces, highlighted by the Shah Commission.

The Shah Commission has estimated loss to exchequer at Rs 350 bn during the period 2006-11. Goa has 81 operating mines (total 340 mines) producing 45 mt per annum.

Brokerages are of the view that the stock is likely to remain under pressure as Sesa was fully dependent on Goa mines for the last one year and will now be dependent on Cain India to support earnings in the coming months.

Global research firm Kim Eng has downgraded the stock to 'sell’ from 'buy' and slashed its target price by 40 per cent to Rs 147/share, citing temporarily mining ban in Goa and slowdown in iron ore demand from China.

After Karnataka, the Ministry of Mines has temporarily banned mining activity in Goa in an effort to clamp down on illegal operations in the industry.

Sesa Goa confirmed that the mines will be closed at least for one month following the government order. Following the ban, Kim Eng revised its FY13 earning forecast by 15 per cent to Rs 34.4/share. Kim Eng net profit forecast is down only 15% due to the cushion provided by Cairn India profit.

Analyst are of the view that the stock is likely to face more pressure going forward weighed down by low iron ore prices and Sterlite Industries merger.

"The stock currently trades at a price to earnings multiple of 4.8 times - a sharp discount to its government-controlled competitor NMDC which produces more than double the iron ore Sesa Goa does. NMDC currently trades at P/E of 10.3 times," ET reported.

SESA Goa sells 70 per cent of its iron ore to China and reports have indicated that the exports to China have suffered due to slowdown in the Chinese economic growth.

Since April 2012, quarterly global iron ore prices have fallen 22 per cent to US$91/ton. “We lower our FY13 revenue forecast by 27 per cent (15 per cent from loss of production, 5 per cent from slowing sales to China and 7 per cent from low iron ore prices) for SESA,” added a Kem Eng report.

Emkay Global research is of the view that the impact of Goa mining ban is likely to be short lived, and maintains 'hold' rating on the stock with a target price of Rs 170/share.

"Taking into account the current ban on mining in Goa, we have revised down our Sesa Goa's iron ore volume assumptions for FY13 to 10.7 mt (earlier 13.2) resulting into an 8% drop in FY13 EPS to Rs 40.1 while FY14 EPS remains unchanged," Emkay said in a report.