Stock Review: SESA GOA

Vedanta's open offer to Cairn India's shareholders, through its Indian subsidiary Sesa Goa, is likely to strain the mining company's balance sheet. Given its latest reported cash and debt on books, Sesa Goa will have to look for alternative funding to finance the open offer, which is not related to its core activities. After several months of uncertainty, Sebi has finally cleared the way for Sesa Goa to purchase up to 20% of Cairn India's paidup shares through an open offer. The offer, which will be launched by April 11, is priced at . 355 per share and translates into an outgo of approximately . 13,495.2 crore.

As on September 30, 2010, cash on Sesa Goa's books was . 1,424 crore, while its debt was . 1,016.5 crore. Though the deal may be value accretive in the long term, there is little on the table for Sesa shareholders in the near term.

Though oil exploration and production is a lucrative business, given the upward movement of oil prices and high entry barriers for new players, Vedanta's lack of expertise in this field could be of concern to shareholders of Sesa Goa.

The stock of Sesa Goa has gained 26% in the past two weeks following a few positive developments. Factors, which were previously viewed as roadblocks, now look favourable for the largest iron ore miner in the country.

First, the company acquired beleaguered Bellary Steel and Alloys in competitive bidding a few weeks ago. The news of the Supreme Court lifting the ban on iron ore exports from Karnataka would be another positive. As a part of its forward integration strategy, Sesa Goa acquired BSAL for a cash consideration of . 220 crore. This will, however, have a long-term impact. Analysts don't see it adding to revenues before FY13.

The export ban, which prevailed since July 2010, is expected to reduce its iron ore output to 2.5 million tonnes from 4 million tonnes a year ago. The management believes it will achieve an annual output of 5-6 million tonnes by FY 12.

On Wednesday, the stock closed 3.7% higher at . 326 on the Bombay Stock Exchange. It trades at a 12-month trailing price earnings ratio of 8 times, which is not expensive considering the expected increase in its output in the future.