Soaring iron ore prices and higher output of the raw material will drive Sesa Goa Ltd’s performance in fiscal 2011, but there are several uncertainties on the horizon. These include a ban on imports by China on certain low grades of ore, delays in getting evacuation permits and environmental clearances, and an appreciating rupee.
At first, Sesa’s projection of a 20-25% increase in deliveries in fiscal 2011 may seem weak compared with the previous year’s 36% growth. But this higher growth has been mainly achieved due to the contribution of iron ore from its Dempo acquisition. Adjusted for that, sales growth was 12% and 11% in the full year and March quarter, respectively. Dempo’s figures reflect in Sesa’s results from June 2009. The base effect will fade after the June quarter.
Graphic: Ahmed Raza Khan / Mint
Sesa reported a net increase of 43 million tonnes (mt) in its iron ore reserves through exploration activity in Goa and Karnataka. It produced about 21 mt of iron ore during fiscal 2010.
In the March quarter, iron ore sales rose 76% to Rs2,260 crore while segment profit nearly doubled to Rs1,451 crore. While dispatches grew 46%, average price realizations rose 20% over the same period last year.
Among costs, freight, staff and royalty charges have seen sharp increases. The operating profit margin in the March quarter still widened to 62%, from 52% a year ago.
Sesa’s stock price was flat after results were announced, as the net profit came slightly below expectations.
The full impact of higher iron ore prices should reflect in fiscal 2011. The company management said that it was facing some delays in getting permits and even in environmental clearances.
Output may have been higher, but for these issues. If these hiccups do not get resolved in fiscal 2011, they may constrain output.
China has asked traders not to import ore with less than 60% iron content. While Sesa is not seeing any impact as yet, this may change in the near future. While rising ore prices are good news, they are also leading to higher steel prices.
Any government decision to cool prices by imposing a ban on iron ore exports or by hiking the export duty will hit companies, including Sesa.
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