Sesa Goa: Realisations drop

Sesa Goa saw its profits and revenues fall a whopping 50 per cent and 38 per cent, respectively, on a year-on-year basis for the September 2009 quarter even as it sold more iron ore and pig iron. Although the performance includes the numbers of Dempo Mining, acquired in June this year, the Street was disappointed.

The results came on Tuesday after market hours. Sesa Goa’s stock fell 8 per cent on Wednesday as against Sensex’s fall of 1.24 per cent and a 1.7 per cent decline in the BSE Metal index. Profits were down largely due to lower realisations, driven by depressed international iron ore prices. On an average, Sesa Goa’s realisations were down by about 50 per cent to $51 a tonne.

Since mid-August 2009, the basis for calculating royalty charges on iron ore was changed by the government from a fixed rate to the ad-valorem rate of 10 per cent, which led to higher royalty costs. The company’s pig iron and metallurgical coke businesses, too, reported higher volumes, but these were also not enough to offset the decline in realisations. Thus, the revenues and profitability were lower.

The September quarter is typically the weakest for the company as iron ore mining volumes are lower due to the monsoons. The sales mix thus differs with its Karnataka and Orissa mines contributing more as compared to the Goa mines. And, since the Goa mines have a low-cost structure, the impact is visible on the company’s profitability. Going ahead, the company hopes that the second half of 2009-10 will be relatively better, helped by higher volumes and realisations; on an annual basis, iron ore volumes are seen rising 20-25 per cent.

During the quarter, Sesa Goa raised $500 million through an FCCB issue to fund its capex plans, which along with net cash equivalent of nearly Rs 2,000 crore at the beginning of the year is likely to be used to acquire mining assets in India or abroad.

Anticipating an acquisition, the stock has outperformed the market in the last one month, while its outperformance since March has been helped by a rise in spot iron ore prices. In the near-term though, analysts don’t expect a significant increase in average iron ore realisations for the company. Overall, given the stock’s outperformance and that it is trading at 12 times its estimated fully diluted EPS for 2010-11, it is not cheap at Rs 319.45.