Goldman Sachs retains 'buy' on Sesa Goa

RESEARCH: GOLDMAN SACHS

RATING: BUY

CMP: RS 3,005

Goldman Sachs retains its positive stance and ���buy��� rating on Sesa Goa with a 12-month target price of Rs 5,450. However, it has removed the company from its ���conviction buy��� list, as Sesa Goa has breached stop-loss territory relative to the coverage universe.

Sesa Goa���s share price has fallen 27% since May 22, ���08, compared to a 20% fall in the Sensex. This decline is attributed to the weakness in the broader market and not to any failure on the company���s part. The ���buy��� rating on the stock is based on a positive view on the fundamentals of the iron ore sector, with sustained deficit in seaborne trade well into ���09. The valuation suggests an NAV of Rs 4,189 per share for Sesa Goa.

Goldman Sachs has arrived at a target price of Rs 5,450 using a combination of DCF and EV/EBITDA multiple-based valuation. In the long term, the market assigns a premium to Sesa Goa���s DCF-based NAV, given the positive sector fundamentals and the company���s growth profile.

The stock is currently trading at 2.5x EV/EBITDA FY09E, and is at a 29% discount to DCF-based NAV. The risks include: 1) Weaker than expected iron ore prices on the back of a slowdown in steel production in China; 2) Slower than expected ramp-up in iron ore volumes; 3) Regulatory measures; and 4) Announcement of non-remunerative deployment of surplus cash pile.