Reco price: Rs 367
Current market price: Rs 380.85
Target price: Rs 455
Upside: 19.5%
Brokerage: Edelweiss Securities
Sesa Goa will be a key beneficiary of the strong uptrend in iron ore imports and steel production in China. While it exports around 95 per cent of its total volumes, China accounts for 84 per cent of its sales volume currently. Sesa Goa (including Dempo) is expected to produce 26.8 million tonnes (MT) of iron ore in 2010-11 and 33.4 MT in 2011-12. The management is targeting total volume of 50 MT in the next two-three years i.e., latest FY13. The company announced a capex of Rs 1,500 crore for this capacity expansion, to be spent over three years.
The company is adopting a multi-pronged approach of brown-field exploration, making third-party mining arrangements and acquisitions in India and abroad to increase its resource base. Consequently, its resource base is expected to increase to at least 500 MT from the current 310 MT (including Dempo) in the next two-three years as per managements’ guidance. In terms of earnings, the stock is trading at an EV/EBITDA of 3.1 for based on estimated numbers for 2011-12, which is at a substantial discount. The company’s EBIDTA and EPS are expected to post a CAGR of 41 per cent and 40 per cent, respectively from 2009-10 to 2011-12 led by its superior volume growth profile. Edelweiss estimates Sesa Goa’s fair value at Rs 465.
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