Sesa Goa NEUTRAL. Performance Highlights CMP. `372 Target Price - 2QFY2011 Result Update Mining. Investment Period -

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1 2QFY211 Result Update Mining October 18, 21 Sesa Goa Performance Highlights Particulars (` cr) 2QFY211 2QFY21 % chg (yoy) 1QFY211 % chg (qoq) Net sales ,413 (61.9) EBITDA ,46 (76.7) EBITDA margin bp 6.5 (2,349bp) Net profit ,32 (7) Sesa Goa s 2QFY211 results were lower than our estimates. The top line was lower by 1.3% on account of 14% lower-than-expected iron ore realisations at US $73/tonne. The bottom line was lower by 21.3% compared to our estimates. Dismal operating performance: Sesa Goa s top line increased by 7.5% yoy to `918cr. Iron ore sales volume at 2.mn tonnes was up by 23.7% yoy. However, volumes were severely affected by the export restriction imposed by the Karnataka government at the end of July. Despite benchmark iron ore prices increasing by ~3% qoq, average realisations were lower by 19.1% qoq (up 48% yoy) at US $73/tonne. Pig iron sales volume increased by 25.4% yoy to 84, tonnes. Average realisation also increased by 35.6% yoy to `25,326/tonne, flat on a qoq basis. In 2QFY211, EBITDA margin declined by 2,349bp qoq to 37% because of lower-than-expected realisations, higher export duty, increased royalty rates and higher freight cost per tonne. Other income decreased by 37.6% qoq to `1.4cr (up 12.5% yoy). Lower tax rate at 4.6% v/s 22.9% in 2QFY21 led to a 131.3% yoy increase in the bottom line to `385cr, down 7.4% qoq. Outlook and valuation: Sesa Goa is currently trading at 4.8x FY211E and 4.1x FY212E EV/EBITDA. On a P/BV basis, the stock is trading at 2.5x FY211E and 2.x FY212E estimates. With volume growth minimal at 8 1% due to government policy actions, reduction in Chinese imports of iron ore and Sesa Goa s diversification into an unrelated business through a 2% stake purchase in Cairn, we maintain our Neutral view on the stock. Further, downside risk to our estimates exists in case the ban on export of iron ore from Karnataka is not revoked. Key Financials (Consolidated) Y/E March (` cr) FY29 FY21 FY211E FY212E Net sales 4,918 5,798 8,648 9,233 % chg Net profit 1,988 2,629 4,12 3,641 % chg (11.2) FDEPS (`) OPM P/E (x) P/BV (x) RoE RoCE EV/Sales (x) EV/EBITDA (x) NEUTRAL CMP `372 Target Price - Investment Period - Stock Info Sector Mining Market Cap (` cr) 32,15 Beta Week High / Low 495/266 Avg. Daily Volume Face Value (`) 1 BSE Sensex 2,169 Nifty 6,76 Reuters Code SESA.BO Bloomberg Code SESA@IN Shareholding Pattern Promoters 55.7 MF / Banks / Indian Fls 3.4 FII / NRIs / OCBs 27.2 Indian Public / Others 13.7 Abs. 3m 1yr 3yr Sensex Sesa Goa Paresh Jain Tel: Ext: pareshn.jain@angeltrade.com Pooja Jain Tel: Ext: pooja.j@angeltrade.com Please refer to important disclosures at the end of this report 1

2 Sesa Goa 2QFY211 Result Update Exhibit 1: 2QFY211 performance (Consolidated) (` cr) 2QFY11 2QFY1 yoy 1HFY11 1HY1 yoy Net sales ,331 1, Raw material 55 (13) (527.8) % of net sales 6. (2.4) Consumption of stores % of net sales Staff cost % of net sales Export duty , ,998.8 % of net sales Other expenditure % of net sales Total expenditure , % of net sales EBITDA , % of net sales ,493.5 Interest Depreciation 19 2 (4.) Other income Exceptional items Profit before tax , % of net sales Tax 19 5 (62.5) % of PBT Profit after tax , % of net sales EPS (`) Exhibit 2: 2QFY211 - Actual v/s Angel estimates (` cr) 1QFY11A 1QFY11E Variation Net sales 918 1,24 (1.3) EBITDA (36.3) EBITDA margin (1,55bp) PBT 47 1,588 (74.4) PAT (21.3) October 18, 21 2

3 Sesa Goa 2QFY211 Result Update Volume growth affected by government actions Sesa Goa reported 7.5% yoy increase in top line to `918cr during 2QFY211. Iron ore sales volume at 2.mn tonnes increased by 23.7% yoy. While Goa accounted for ~ 1.mn tonnes of iron ore sales, Karnataka and Orissa accounted for.5mn tonnes each. China accounted for ~75% of the sales volume and the domestic market accounted for 8% of the sales volume. Volumes were, however, severely affected by the temporary export restriction imposed by the Karnataka government at the end of July. During 2QFY211, iron ore production fell by 3.% yoy to 3.2mn tonnes. Average iron ore realisations were lower by 19.1% qoq (up 48% yoy) at US $73/tonne. Pig iron sales volume increased by 25.4% yoy to 84, tonnes. Average realisation also increased by 35.6% yoy to `25,326/tonne, flat on a qoq basis. Exhibit 3: Iron ore sales increased by 23.7% yoy 8. 5 Exhibit 4: Cost/tonne trending up 1 (mn tonne) (US $/tonne) QFY1 2QFY1 3QFY1 4QFY1 1QFY11 2QFY11 1QFY1 2QFY1 3QFY1 4QFY1 1QFY11 2QFY11 Volume - LHS change (yoy) - RHS Revenue/tonne Cost/tonne EBIT/tonne EBITDA margin declines In 2QFY211, EBITDA margin declined by 2,349bp qoq to 37% on account of lower-than-expected realisations, higher export duty, increased royalty rates and higher freight cost per tonne. Freight cost per tonne increased by US $2/tonne from Orissa and Karnataka. Other income decreased by 37.6% qoq to `1.4cr (up 12.5% yoy). Lower tax rate at 4.6% in 2QFY211 v/s 22.9% in 2QFY21 led to a 131.3% yoy increase in the bottom line to `385cr, down 7.4% qoq. Exhibit 5: EBITDA margin tend Exhibit 6: Net profit trend (` cr) 1,6 1,4 1,2 1, (` cr) 1,4 1,2 1, QFY1 2QFY1 3QFY1 4QFY1 1QFY11 2QFY11 EBITDA -LHS EBITDA margin -RHS QFY1 2QFY1 3QFY1 4QFY1 1QFY11 2QFY11 Net profit -LHS Net margin -RHS 2 October 18, 21 3

4 Sesa Goa 2QFY211 Result Update Key highlights Management reduced its sales volume guidance for FY211 to 1% from 2 25% earlier. Due to the export ban from Karnataka, the company witnessed sales loss of 1mn tonne during the quarter. Further, downward revision in sales volume can be expected in case the ban on export of iron ore from Karnataka is not revoked. Iron ore inventory at the end of the quarter stood at 5.3mn tonnes. Excluding the intercorporate deposit of `1,cr, extended to Vedanta Alumnium, the company had cash and cash equivalents of `7,575cr. The Extra Ordinary General meeting passed a resolution to increase the company s investment limit up to `16,cr and increased its borrowing limit up to `15,cr. Average royalty rate charged on iron ore stood at `15 175/tonne. Currently, Sesa Goa s mines in Karnataka and Goa enjoy tax benefits, which will expire by March 211. October 18, 21 4

5 Sesa Goa 2QFY211 Result Update Outlook Declining crude steel production in China For the first eight months of CY21, China produced 426mn tonnes of crude steel, up 15.6% YTD. However, over the last three months, the country has witnessed a decline in steel production on an mom basis, with production degrowing by 4.2%, 3.8% and.2% in June, July and August 21, respectively. Production growth, which was 2%+ yoy during the first five months of CY21, has also tapered off in the last three months. In August 21, production fell by 1.3% yoy. Exhibit 7: China steel production degrowing since June Exhibit 8: China steel production slowing annually (mn tonnes) (5) (mn tonnes) (1) 1 (1) Jan-7 Nov-7 Sep-8 Jul-9 May-1 (15) Jan-7 Nov-7 Sep-8 Jul-9 May-1 (2) Chinese steel production (LHS) mom change (RHS) Chinese steel production (LHS) yoy change (RHS) coupled with increasing domestic iron ore supplies With iron ore prices trading above US $1/tonne, many high-cost iron ore mines in China have started operations, thus leading to a surge in iron ore production. For the first eight months of CY21, domestic iron ore production increased by 28.5% to 681mn tonnes. From June August 21, iron ore production was at an all-time high of ~1mn tonnes/month. Exhibit 9: China domestic iron ore prod. All-time high Exhibit 1: China domestic iron ore prod. up annually (mn tonnes) (2) (mn tonnes) (4) (2) Jan-7 Nov-7 Sep-8 Jul-9 May-1 Jan-7 Nov-7 Sep-8 Jul-9 May-1 Iron ore production (LHS) mom change (RHS) Iron ore production (LHS) yoy change (RHS) October 18, 21 5

6 Sesa Goa 2QFY211 Result Update leading to reduced demand for imported ore Demand for imported ore has been declining, as domestic Chinese iron ore production is outpacing steel production. Consequently, imports have witnessed successive declines over the last five months on a yoy basis. In July, August and September 21, imports declined by 14.7%, 11.7% and 1.2%, respectively. Iron ore inventory at Chinese ports has also increased over the last one month from 69mn tonnes to 73.7mn tonnes. Exhibit 11: Falling iron ore imports to China Exhibit 12: Increasing inventory at Chinese ports (mn tonnes) (2) Jan-7 Nov-7 Sep-8 Jul-9 May-1 China Iron ore imports (LHS) yoy change (RHS) (mn tonnes) Jan Feb 16-Apr 28-May 9-Jul 2-Aug 15-Oct Iron ore inventory at Chinese ports However, prices continue to remain firm in the spot market on account of supply disruptions from India as the Karnataka government has banned iron ore exports and the Orissa government has imposed strict restrictions to crack down illegal mining in the state. Consequently, India s share in total imports to China has fallen from ~2% at the beginning of the year to 11.4% in August 21. Exhibit 13: Spot iron ore prices firm... Exhibit 14:...as imports from India decline (US $/tonne) Jan-7 Nov-7 Sep-8 Jul-9 May-1 Iron ore prices (mn tonnes) Jan-7 Nov-7 Sep-8 Jul-9 May-1 India's exports into China (LHS) % of total Chinese imports (RHS) October 18, 21 6

7 Sesa Goa 2QFY211 Result Update Valuation Sesa Goa is currently trading at 4.8x FY211E and 4.1x FY212E EV/EBITDA. On a P/BV basis, the stock is trading at 2.5x FY211E and 2.x FY212E estimates. With volume growth minimal at 8 1% due to government policy actions, reduction in Chinese imports of iron ore and Sesa Goa s diversification into an unrelated business through a 2% stake purchase in Cairn, we maintain our Neutral view on the stock. Further, downside risk to our estimates exists in case the ban on export of iron ore from Karnataka is not revoked. Exhibit 15: Key assumptions Earlier Revised FY11E FY12E FY11E FY12E Iron ore Sales volume (mn tonnes) Average realisation (US $/tonne) Coke Sales volume (tonnes) 26, 365, 26, 365, Average realisation (US $/tonne) Coking coal Average cost (US $/tonne) Pig iron Sales volume (tonnes) 237,5 46,25 237,5 46,25 Average realisation (US $/tonne) Royalty (US $/tonne) Export duty (US $/tonne) US $/` Source: Angel Research We have revised our estimates for FY211E and FY212E to factor in lower volume growth and realisations. Exhibit 16: Change in estimates (` cr) Earlier estimates Revised estimates Upgrade/(downgrade) FY11E FY12E FY11E FY12E FY11E FY12E Net sales 9,778 1,586 8,648 9,233 (11.6) (12.8) EBITDA 5,358 5,661 4,621 4,777 (13.8) (15.6) EBITDA margin (137bp) (173bp) PBT 5,795 6,251 5,57 5,377 (12.7) (14.) PAT 4,61 4,44 4,13 3,779 (12.8) (14.2) PAT margin (66bp) (67bp) Source: Angel Research October 18, 21 7

8 Sesa Goa 2QFY211 Result Update Exhibit 17: EPS Angel forecast v/s consensus Year Angel forecast Bloomberg consensus Variation FY211E (6.1) FY212E (26.14) Exhibit 18: Recommendation summary Companies CMP Target Price Reco. Mcap Upside P/E (x) P/BV (x) EV/EBITDA (x) RoE RoCE (`) (`) (` cr) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E SAIL Neutral 91, Tata Steel Accumulate 55, JSW Steel 1,318 - Neutral 33, Bhushan Steel Sell 1,936 (23.1) Sesa Goa Neutral 33, NMDC Neutral 113, Hindalco Neutral 4, Nalco Sell 26,288 (22.5) Sterlite Accumulate 59, Hindustan Zinc 1,22 - Neutral 51, Source: Angel Research Exhibit 19: EV/EBITDA band ( `cr) 35, 3, 25, 2, 15, 1, 5, Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 7.x 5.5x 4.x 2.5x 1.x October 18, 21 8

9 Sesa Goa 2QFY211 Result Update Exhibit 2: P/E band 6 (`) x 9.x 6.x 3.x Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 Exhibit 21: P/BV band 8 (`) x 3.x 2.x 1.x Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 October 18, 21 9

10 Sesa Goa 2QFY211 Result Update Profit & Loss Statement (Consolidated) Y/E March (` cr) FY27 FY28 FY29 FY21 FY211E FY212E Gross sales 2,236 3,845 4,991 5,842 8,821 9,417 Less: Excise duty Net sales 2,176 3,766 4,918 5,798 8,648 9,233 Other operating income Total operating income 2,218 3,823 4,959 5,858 8,648 9,233 % chg Total expenditure 1,255 1,519 2,417 2,71 4,28 4,456 Net raw materials Other mfg costs Personnel Other ,452 1,654 2,623 2,826 EBITDA 963 2,33 2,542 3,149 4,621 4,777 % chg (% of Net sales) Depreciation EBIT 924 2,253 2,49 3,74 4,542 4,666 % chg (% of Net sales) Interest charges Other income (% of PBT) Share in profit of asso Recurring PBT 966 2,325 2,71 3,445 5,57 5,384 % chg Extra. Inc/(Expense) PBT (reported) 966 2,325 2,71 3,445 5,57 5,384 Tax ,777 (% of PBT) PAT (reported) 651 1,549 1,995 2,639 4,147 3,67 Add: Earnings of asso Less: Minority interest (7) (1) (45) 34 Extra. Expense/(Inc.) PAT after MI (reported) 651 1,549 1,988 2,629 4,12 3,641 ADJ. PAT 651 1,549 1,988 2,629 4,12 3,641 % chg (11.2) (% of Net sales) Basic EPS (`) Fully Diluted EPS (`) % chg (11.2) October 18, 21 1

11 Sesa Goa 2QFY211 Result Update Balance Sheet (Consolidated) Y/E March (` cr) FY27 FY28 FY29 FY21 FY211E FY212E SOURCES OF FUNDS Equity share capital Reserves & surplus 1,57 2,94 4,637 7,835 13,332 16,457 Shareholders funds 1,69 2,943 4,716 7,918 13,421 16,546 Share warrants Minority interest Total loans , Deferred tax liability Total liabilities 1,693 3,36 4,817 9,997 13,628 16,721 APPLICATION OF FUNDS Gross block ,751 2,91 3,727 Less: Acc. depreciation Net block ,177 2,249 2,964 Capital work-in-progress Goodwill Investments 845 2,51 3,125 4,565 4,565 4,565 Current assets ,683 4,416 7,643 1,352 Cash ,392 5,444 7,965 Loans & advances ,13 1,146 1,146 1,146 Other ,53 1,241 Current liabilities ,24 1,232 1,264 Net current assets ,99 3,176 6,41 9,88 Mis. exp. not written off Total assets 1,693 3,36 4,817 9,997 13,628 16,721 Note: Cash and bank balance include deposits October 18, 21 11

12 Sesa Goa 2QFY211 Result Update Cash Flow Statement (Consolidated) Y/E March (` cr) FY27 FY28 FY29 FY21 FY211E FY212E Profit before tax 966 2,325 2,71 3,445 5,57 5,384 Depreciation Change in working capital (24) (17) (382) (156) Less: Other income (43) (71) (221) (363) - - Direct taxes paid ,777 Cash flow from operations 614 1,387 2,134 2,571 3,844 3,563 (Inc.)/Dec. in fixed assets (112) (67) (147) (149) (476) (526) (Inc.)/Dec. in investments (371) (1,25) (965) (3,78) - - (Inc.)/Dec. in loans & adv. Other income (2,168) - - Cash flow from investing (441) (1,23) (999) (5,394) (476) (526) Issue of equity ,916 - Inc./(Dec.) in loans (1) - - 2,358 (1,916) - Dividend paid (Incl. tax) Others - - 1, Cash flow from financing (19) (184) (1,139) 2,682 (316) (515) Inc./(Dec.) in cash (16) () (3) (141) 3,52 2,521 Opening cash balances ,392 5,444 Closing cash balances ,444 7,965 October 18, 21 12

13 Sesa Goa 2QFY211 Result Update Key Ratios Y/E March FY27 FY28 FY29 FY21 FY211E FY212E Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book value DuPont analysis EBIT margin Tax retention ratio Asset turnover (x) RoIC (post-tax) Cost of debt Leverage (x) Operating RoE Returns RoCE (pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset T/o (gross block) Inventory (days) Receivables (days) Payables (days) WC capital (days) Solvency ratios (x) Net debt to equity (.5) (.7) (.9) (.8) (.8) (.8) Net debt to EBITDA (.9) (.9) (1.6) (1.9) (2.4) (2.8) Interest coverage ,332.9 October 18, 21 13

14 Sesa Goa 2QFY211 Result Update Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Sesa Goa 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock Yes 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) October 18, 21 14