Stock Review: SESA GOA

Sesa Goa's March quarter performance was a shade better when compared to the previous quarter due to increased volumes and higher prices of iron ore. But it would be too early to predict a full recovery in its business prospects since issues pertaining to its operations still persist. Investors are concerned about lack clarity on its open offer to Cairn India's minority shareholders, which is under the government's scanner. Also, the status on lifting of ban on iron ore exports by the Karnataka government remains pending in the Supreme Court. The company is also yet to resolve issues regarding environmental clearances for its new mining capacities. These factors would continue to impact the company's business, and therefore, its stock valuation in the near term.

In the March quarter, Sesa Goa's net profit grew by 21% year-on-year on the back of a strong 50% growth in net sales. Iron ore production for the country's largest miner was 20% lower compared with the same quarter last year. This was due to the export ban in Karnataka, prevalent since July 2010 and also because of the termination of the third-party mining agreement in Orissa since November 2010.

But the rise in international iron ore prices by more than 35% year-on-year resulted in improved realisations. Its operating profit increased 41% as a result of higher iron ore shipments and lower inland transportation costs.

The final verdict on the statewide export ban in Karnataka is expected in the first week of May. If the ruling goes in favour of the miner, volumes are likely to grow further as a result of this clearance with an annual capacity of six million tonne expected from its Karnataka operations.

As on March 31, 2011, the company's total reserves and resources increased 12% over the previous year to 306 million tonne. Over the next two years, the company plans to expand its iron ore capacity by over 75% to 30 million tonne in Goa and 10 million tonne in Karnataka. This is, however, subject to certain environmental clearance from the government.

Earlier this month, the company acquired a 10% stake in Cairn India at . 331 a share. This is in addition to the open offer it made, at . 355 a share, for the oil company. What causes concern is the uncertainty over the royalty issue.