The acquisition is well-timed, reasonably valued and will boost Sesa Goa’s growth

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Sesa Goa’s acquisition of Dempo’s mining assets will add to its earnings per share in the current year---analysts expect an increase of around 10-12 per cent. That apart, the deal has been done at a very reasonable valuation of around 4 times trailing EV/ebitda ( enterprise value/earnings before interest, tax depreciation).

Not surprisingly the stock closed 5.6 per cent higher on Friday but even before this it had run up sharply. Since April this year, it has gained more than 100 per cent to the Nifty’s 50 per cent and it has risen 40 per cent in the last one month. The Street also likes the acquisition because the bill of Rs 1,750 crore will be paid from its cash balances of close to Rs 4,000 crore. Also, the timing seems to be good—Rakesh Arora who tracks the metals and mining spaces at Macquarie Securities believes that iron ore prices may have bottomed out.

Arora sees demand picking up in big markets like China and feels, therefore, that the current iron ore prices of between $55-60 per tonne should sutain. So it’s just as well that Sesa Goa will have bigger quantities to sell; together with Dempo’s four million tonnes, volumes should be higher by about 20-25 per cent in the current year. Of course, the prices at which the company has entered into long-term contracts are believed to be around 30 per cent lower than what they were in 2008-09. Typically, Sesa Goa sells around 70 per cent of its output in the spot market and enters into long-term price agreements for the rest.

Dempo’s cost of production, at around $17 per tonne, is understood to be higher than that for Sesa Goa which is around $12 per tonne. Analysts point out that Dempo’s operating margin last year was around 43 per cent compared with 51 per cent for Sesa Goa and believe it should be possible for production costs to be lowered at Dempo’s mines. Sesa Goa’s revenues this year are expected to come in close to Rs 5,100 crore over the Rs 4,959 crore posted last year.

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