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Sesa Goa – Weak Results – Low Volumes

October 21, 2009

Sesa Goa reported standalone PAT of Rs1.4bn, 55% lower YoY on a sharp decline in realizations. While operating profit margin fell sharply to 23% in 2QFY10 from 45% in 2QFY09, higher other income at Rs891m (+86% YoY, 2x our estimate) helped raise the EBITDA margin to 43% vs 50% last year.

2Q iron ore sales rose 17% YoY to 1.6m tonnes, much lower than 4.7m tonnes in 1Q (Goa sales fall during the monsoon). In FY10, we assume a 45% volume growth (including Dempo). Spot sales dominate with 1H contract sales only ~7%, but management hopes to exit FY10 with a 50:50 spot/contract ratio.

While spot iron ore prices have risen by 8% from recent lows (in Sept), it is
still 20% below peak levels in August 2009. Although the company did not provide incremental information on inorganic plans, we think, with the recent fund raising, the company may be looking at some potential inorganic growth opportunities.

Sesa Goa EPS and Ratings
Goldman Sachs expects its EPS to be 23 and 36 for FY10 and FY11 respectively.

However, analysts at Citigroup have a different view – EPS to be 21 and 23 for FY10 and FY11 respectively.

Edelweiss expects its EPS to be 24 and 35 for FY10 and FY11 respectively.

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