Sesa Sterlite: Gains from lifting of Goa mining ban priced in

The lifting of the iron ore mining ban in Goa brings good news for the shareholders of Sesa Sterlite, whose iron ore business has taken a big hit in the last few years due to the ban. In the overall portfolio of iron ore, Goa accounts for a large chunk of the company’s production. At the peak levels, analysts believe that close to 15 million tonnes of iron ore came from Goa, which because of the ban in the state fell to almost zero. The iron ore business is currently producing about 1.5 million tonnes of iron ore from Karnataka. If the production in Goa resumes, it will have positive implications on the company’s financials. Analysts, though, believe that the ramp-up in production could take some time because of regulatory and other issues and a large part of these benefits will be seen in FY2016.

Nevertheless, analysts do not see the anticipated gains having any significant impact on the share price or valuations of the company. "The market was already factoring this development and most analysts have assumed higher (iron ore) production numbers in FY15 and FY16. We have assumed about three million tonnes in FY15 and six million tonnes in FY16 from Goa,” said Abhisar Jain, who tracks the company at Centrum Broking.

Jain says there could be some upward revision to these production estimates, but even in that case it would not make much difference to the earnings because of only 1-2 per cent contribution coming from the iron ore business in the overall consolidated Ebitda numbers for Sesa Sterlite.

Because of the higher volumes, analysts are expecting Sesa Sterlite's Ebitda for the iron ore business to move up from Rs 82 crore in FY13 to over Rs 500 crore in FY15 and to Rs 580 crore in FY16. This marked improvement in the operating profits is already factored in the estimates of analysts. And, even if the production in Goa is higher by another 1-2 million tonnes, it will not have a major impact on the consolidated estimates because even after accounting for these improvements, the iron ore business would account for about two per cent of the consolidated Ebitda of Sesa Sterlite at around Rs 29,300 crore in FY15.

"We do not see much upside as a large part of the gains are already reflected in the valuations. Also, even if the production figures are higher than the estimates, it will have marginal impact on the valuations considering that only about Rs 4-5 per share comes from the iron ore business while valuing the company on a sum-of-parts basis," said an analyst with a foreign broking house.

On Monday, the stock closed at Rs 201.65, a gain of about 4.8 per cent compared to its previous closing, which analysts say is largely sentiment-driven. Currently, according to Bloomberg estimates, the average target price stands at Rs 209.65, which is about four per cent higher compared to Sesa Sterlite’s current price.