Indian Stock Market News and Analysis

September 11, 2007 India: Steel: Integrated Goldman Sachs Global Investment Research 20 Sesa Goa-Iron ore is the core =20 Source of opportunity=20 =20 We initiate coverage on Sesa Goa with a Buy rating and a 12-month target p= rice of Rs 2,504, implying 28% potential upside. Sesa Goa is India’s largest= exporter of iron ore in the private sector and is a direct play on iron ore= price negotiations, in our view.=20 =20 With sustained tightness in the iron ore market, we believe it will be a d= irect beneficiary of higher iron ore prices. High margins, attractive return= s, debt-free balance sheet, strong free cashflow generation and cash pile of= Rs 220 per share are added positives, in our view. =20 Business outlook in FY2008E =20 We expect a 6% CAGR growth in iron ore volumes from debottlenecking of exi= sting capacity over the next two years. However, with the iron ore market re= maining tight, the Goldman Sachs JBWere commodities team estimates benchmark= iron ore prices to rise 30% for FY2009E.=20 =20 Further, we believe non iron ore businesses would benefit from a robust ou= tlook on pig iron and met coke prices. Reining in logistics costs will remai= n a key focus area, in our view. Additionally, post the completion of the on= going open offer,we expect the new promoters–Vedanta Resources (VED.LN, Neu= tral)–to announce plans for deploying its surplus cash reserves. =20 Catalysts =20 We expect Sesa Goa to deliver 40% earnings CAGR over FY2007-FY2009E on the= back of a bullish iron ore price outlook and modest volume growth. Further,= we believe potential announcements on strategic use of the cash pile or exp= ansion plans post completion of the open offer by Vedanta Resources could pr= ovide potential upside triggers.=20 =20 We believe the company’s stock price is sensitive to newsflow on iron ore = prices; with about 75% of output sold through long-term contracts, we expect= potential newsflow on bullish iron ore prices to incrementally drive stock = performance. =20 Valuation =20 At 2.8x one-year forward EV/EBITDA–which is at a 50% discount to global m= ining companies–we believe the stock is attractively valued. Our 12-month t= arget price is based on DCF, assuming a WACC of 11.2% on target gearing of 0= .67x (40:60 debt:equity). =20 Key risks =20 1) Weaker-than-expected iron ore prices on the back of a slowdown in steel= production in China; 2) slower-than-expected ramp-up of volumes through deb= ottlenecking; 3) regulatory and administrative measures to curb iron ore exp= orts (similar to imposing a tax on high-grade iron ore exports this year). =20
Safe Harbor Statement: =20 Some forward looking statements on projections, estimates, expectations & ou= tlook are included to enable a better comprehension of the Company prospects= . Actual results may, however, differ materially from those stated on accoun= t of factors such as changes in government regulations, tax regimes, economi= c developments within India and the countries within which the Company condu= cts its business, exchange rate and interest rate movements, impact of compe= ting products and their pricing, product demand and supply constraints. =20 Nothing in this article is, or should be construed as, investment advice.= =20 =20 =20 =20 =20
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