Sesa Goa Q3FY12 Result update and analysis

Sesa Goa the biggest private iron ore mining company announced it result on Wednesday 25th Jan 2012. The net sales of the company grew by 16.3% on YoY basis to Rs 2617 Crore.  While the Net profit of the company is down by 46% on YoY basis to Rs 569 Crore.  The growth on the top line was on back of the increase in the sales volume and higher realizations during the quarter. The Iron ore production during the Quarter stood at 3.33 Mn tonnes lower as compare to that of 4.70 Mn tonne in Q3FY11. However sales volume during the quarter increased by 5.5% to 5.04Mn against that of 4.78MT in Q3FY11. This was largely on account of the inventory clearance of 0.64Mt in Karnataka through e-auctions and another 1.1MT from Goa. Company major mines in Goa continue to operate at full capacity (14MTPA).

During nine months period, production was 8.84 mt as compared with 13.31 mt (11.90 mt excluding Orissa) in the corresponding prior period. The decline is mainly on account of the ban on mining operations in Karnataka and planned reduction in inventories.

Realization during the quarter improved by 10% on YoY basis, on back of the improvement in the iron ore grade by 0.5%. Also sharp rupee depreciation helped the company to report better realizations. However going forward we don’t see much improvement in the realization as we don’t see much improvement in the iron ore grade in the coming quarter, also iron ore prices in the international market has come down significantly.

The operating margin of the company declined significantly by 2200 bps to 35.11% on YoY basis. The lower Operating margin was mainly on account of the increased export duty on the iron ore by the regulatory bodies which was effective from the Q1FY12. The first hike came in during April 2011, increasing the duty to 20% on both iron ore fines (From5%) and lumps from 15%. The hike in the export duty largely impacted the company’s operating margins. With further hiked in export duty to 30% effective 30^th December, we believe pressure on the EBITDA margins to continue going ahead.

Moreover there are lots of concerns which are currently hampering the mining sector. Karnataka mines are still under ban and hearing from the Supreme Court has been continuously deferred with no immediate respite. Further report by MB shah commission on investigating illegal mining will most probably be released by March 2012 which can also raise concerns over Goan Mines operations. Also the implementation of new mining bill and revision of the royalty rates in August 2012 could impact the company’s sales volume in coming quarter. Therefore on back of lot of uncertainty we advice investors to stay away from the scrip.