Sesa Goa – Cheap on valuations

Sesa Goa is India’s largest iron ore producer exporter with an expected annual output of 16 mn tons in FY2009 and would go up to 25 mn tons by FY2012 following recent expansion initiatives. According to Sesa, with its average cost of production of US$24/ton, it is in the first quartile of the global cost curve and the cost of production at its Goa operations at less than US$15/ton are the lowest in the world.

Sesa Goa has operations in Goa, Karnataka, and Orissa. Logistics costs greatly impact performance across geographies. Currently, the company has reserves and resources of 180 mn tons and it plans to announce discoveries and acquisitions of more than 300-500 mn tons shortly, significantly improving the longevity of the business.

Sesa has historically engaged in iron ore mining from its own mines as well as third party mines where the lease ownership rests with other parties and they are generally paid royalty which is indexed to the prevalent iron ore prices. The Sonshi mines in Goa and the Thakurani mines in Orissa are on third party basis.

Strategy during Slowdown:
Sesa is selling more than 80% of its sales on the spot markets as the long-term customers are refusing to accept deliveries due to lower spot prices and demand erosion for steel forcing them to idle their blast furnaces. Sesa is looking to increase sales of ore on a CFR basis instead of the usual FOB basis, this would fetch it an additional couple of dollars on the spread. Sesa is trying to gain market share by offering ore at benchmark prices using the lower freight from Australia-to-China instead of the usual India-to-China freight.

Valuations:
Sesa is trading at inexpensive valuations of 1.4X EV/EBITDA and 3.9X PE its estimated FY2010 earnings. Sesa has Rs37 bn (Rs43/share) in cash. Sesa is expected to report an EPS of Rs 19 for FY10 and Rs 22.5 for FY11.

Sesa Goa is 51% is owned by Vedanata, the flagship holding company of Mr. Anil Aggarwal. Anil is associated with Sterlite group.