Sesa Goa: Rusting realisations

Low iron ore prices are expected to be a drag on earnings.

The impressive gains recorded by Sesa Goa are set to become more rational now. Iron ore prices, which had run up considerably, have scaled down 36 per cent since April. Realisations are also expected to fall in the coming months, reckon analysts. Hence, many numbers may be revised downwards.

Even in the June quarter, iron ore volumes were down 26.2 per cent to 5.44 million tonnes, as compared to 7.38 million tonnes in the March quarter. Similarly, pig iron volumes were lower 23 per cent sequentially. Strong realisations in iron ore and pig iron, at 36 per cent and 18 per cent, respectively, saw the company record steady numbers, even though volumes were disrupted due to problems in Karnataka.

On an annual basis, most growth matrices looked strong. The earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 61 per cent was lower than the 63 per cent recorded in the previous quarter, as a jump of around 29 per cent in rail freights ate into margins. The per tonne cost of iron ore increased from Rs 977 to Rs 1,459 due to higher freight, royalty and export duties.

Going ahead, lower realisations are expected to mute earnings gains. According to Goldman Sachs, “With a slowdown in Chinese steel production and weak steel prices, we think a turnaround in spot iron ore prices is unlikely in the near term.” To put things in perspective, spot iron ore prices (58 per cent grade freight on board China) were at $65 per tonne, as against the June quarter realisation of around $85 per tonne, they added.

The management has guided it will be able to maintain 20-25 per cent volume growth in FY11. However, there are concerns on logistics bottlenecks, coupled with regulatory uncertainties. Also, long-term agreements with third-party miners in Orissa are not finalised yet, further adding an element of uncertainty, say analysts. Developments on the volume front and improvement in Chinese consumption could be the likely triggers, they reckon.