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Wednesday, February 20, 2008

Multi Bagger: Sesa Goa

Recommended Price Rs 3150.15

Report Dated: Feb 18, 2008

Company description:
Sesa Goa Limited, the flagship company of Sesa Group is India's largest exporter of iron ore in the private sector. In September 2007, Vedanta Resources acquired an additional 20% stake in Sesa Goa, increasing its total shareholding in the Company to 71%. Iron ore business contributes to about 80% of the company's revenues. The company has access to over 200 million tons of iron ore reserves in Goa, Karnataka and Orissa. It has also developed an energy recovery technology to manufacture coke, compliant with advanced global emission norms.

Shareholding Pattern:

As on 31st Dec 2007     Holding (%)     No of shares (in lacs) 
Promoters       51.2    201.4  
Non promoter corporate holding  4.9     19.2   
FII & Institutions      31.4    123.1  
Public and others       12.6    49.4   

Major beneficiary from strong upswing in iron ore price cycle
Iron ore, the key raw material for steelmaking, has witnessed a surge in demand, leading to prices rising 2.5x over the past four years. Chinese spot prices are trading well above the $ 200/ton level, doubling over the year. With new contracts for CY08 supply due for negotiations during the month, Sesa Goa would be a major beneficiary with an expected revision of 50%. About 80% of revenues and 95% of profits of the company comes from the iron ore business.

20 years of iron ore reserves and more to come
Sesa Goa has 200 million tons of iron ore reserves, which is expected to last for about 20 years at current level of production. Its mines are located at Goa, Karnataka and Orissa. Management has indicated aggressive ramp up in production to 15mtpa by end-FY09 from 10.8mtpa at present on account of increased global demand and favourable demand dynamics in the iron ore industry leading to an improved pricing scenario in the near-to-medium term. Sesa Goa had obtained prospecting licenses for mining in Jharkhand, which could surprise positively as regards high-grade reserve content. Total reserves at Jharkhand may be more than earlier estimates of 50mn tons.

Ramp up in pig iron and coke making capacity
The company plans to increase its pig iron capacity from the current 0.2mtpa to about 1mtpa and met coke capacity from the current 0.28mtpa to about 1mtpa in the next 3 years. India is an importer of coke and with coke prices expected to rise in the next two years, the expansion is well timed. Sesa Goa will also benefit from the growing domestic demand for semi-finished products.

Valuations at discount to global peers
We expect Sesa Goa's profits to witness 55.5% CAGR over FY07-09 on the back of robust outlook for iron ore and met coke prices. Operating margins are expected to expand with decline in manufacturing cost. The company trades at 8.0x FY09E EPS of Rs 395.4 which is at 38% discount to global peers BHP Billion and Rio Tinto. We recommend BUY with a 12-month target price of Rs 4,350 implying an upside of 38%.

Financials:

March (Rs Cr)   FY06    FY07    FY08E   FY09E  
Revenues        1,818   2176    2699    3939   
Operating Profit        836     921     1330    2287   
OPM (%) 46      42.3    49.3    58.1   
Net Profit      575     651     904     1574   
Equity  39.4    39.4    39.7    39.7   
EPS (Rs)        146     165.4   227.3   395.4  

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