SESA GOA

The government has re-introduced a 5 per cent export tax on iron ore fines and doubled the duty on iron ore lumps to 10 per cent. Last year, it had withdrawn the duties on iron ore fines on account of the sharp dip in iron ore prices; however, it had retained a 5 per cent levy on lumps. A pick-up in iron ore exports (up 21 per cent yearon-year to 53.2 million tonnes in April-October 2009) and improved export realisations (by over 70 per cent since April) prompted the government to raise the iron ore duties. Sesa exports 90-95 per cent of its iron ore output. The brokerage expects Sesa’s 2009-10 and 2010-11 EPS to be negatively impacted by 3.3 per cent and 8.5 per cent, respectively. It has introduced 2011-12 estimates for Sesa and expects iron ore realisations to increase by 21.5 per cent (earlier 10 per cent) in 2010-11 and by 10 per cent in 2011-12, on the back of strong Chinese demand. Iron ore pricing negotiations are expected to start early next year (reports suggest a 20-30 per cent hike). But, considering what happened last year, it is difficult to predict whether China will accept the price hike.

At CMP, the stock is trading at 6.7 times 2011-12 estimated EV/EBITDA. The brokerage has recommended a ‘sell’ on the stock. At its target price of Rs 304, it will trade at 6 times 2011-12 estimated EV/EBITDA, which is at the higher end of its historic trading range.