Stock Review: Sesa Goa

There seems to be no end to Sesa Goa's woes, with the finance minister increasing the export duty on iron lumps and fines to 20 per cent (freight on board) in his Budget proposals on Monday. Given that almost 90 per cent of the company's revenues come from exports, this is a major blow. Both lumps and fines have now been brought under the export duty net.

And fines account for 85 per cent of Sesa Goa's total export volumes. While the export duty on iron ore has undergone several changes (from zero to 20 per cent) over the past couple of years, it's increasingly apparent that as long as iron ore prices remain high (above $100 FOB), the government is likely to continue its stance on export duty. In addition, analysts expect Indian Railways to increase freight rates in the given situation, which will effectively add to costs.

According to a report by Edelweiss Capital, the company has been constantly facing challenges on the volume front with its Orissa mine out of operation, the effective export ban in Karnataka till date and a lack of approvals for additional volumes in Goa. However, analysts are estimating volumes of 21 million tonnes in FY12 on the presumption that the Karnataka ban will be revoked. The state is considering the Supreme Court directive to formulate export guidelines.

With iron ore prices unlikely to come down in the near future, the possibility of a pass-through also seems slender. The company is expected to close FY11 with revenues of `8,502 crore, which are expected to fall to 8,012 crore in FY12. Profitability, too, will come down in line with the export duty increase. The company will have to focus on the domestic market, which will mean lower realisations, believe trade experts.

Angel Broking has raised its expectation of export duty expenses to `1,903 crore for FY12 against its previous forecast of `485 crore. Consequently, the earnings before interest, taxes, depreciation and amortisation estimate for FY12 also stands pruned by 26.1 per cent to 4,008 crore.

Analysts have lowered net profit estimates for financial year 201112 by 22.3 per cent