Stock Review: SESA GOA

Investors of Sesa Goa were distraught after the country's largest iron ore exporter's earnings per share declined 36% in the April-June 2011 quarter and the management slashed its volume growth guidance for the year by 10%. The ongoing suspension of operations at Orissa and the ban on exports from Karnataka resulted in a 12% drop in iron ore sales volumes and a 10% fall in realisations over the year-ago period.

Despite the SC ruling lifting the ban on iron ore exports in April, permits for transportation of iron ore for export have still not been issued, thereby, forcing the company to sell the produce of its Karnataka mines internally at the prevailing domestic prices. Given the uncertainty of the matter, the company plans to sell all of its output from Karnataka in the domestic market for the current fiscal and has lowered its volume growth target from 25-26% to 15-16% for the year.

For the first time in four quarters, Sesa Goa reported a YoY decline of 13% in net sales to . 2,094.7 crore on account of a de-growth in iron ore sales. Its operating profit margin declined by 600 basis points on account of the high cost of production the company bears. Net profit declined 35% to 840.59 crore due to these same reasons.

At 284, the stock is available at a trailing 12-month P/E ratio of 6.5 times which is cheap compared to its PSU peer (NMDC) which trades at a price which is 15 times its trailing 12-month earnings per share. But, in spite of these compelling valuations, the factors that led to Sesa Goa's underperformance in the quarter under review still remain. Contract prices of the key steel-making ingredient may remain firm in near-term owing to strong demand from China and delay in new supplies of iron ore, globally. In the domestic market as well, the closure of certain mines on account of certain environmental issues has led to a rise is local prices. But it will find it hard to sustain operating profit margins of about 55% given the export duty and issues with the Karnataka government.