Sesa Goa Ltd has forecast 15-20% growth in iron ore volumes in fiscal 2012 (FY12), if it is able to export ore from Karnataka. A successful restart of iron ore exports from Karnataka will be a key trigger for the stock.
The ban on exports since July had hit production in the second half of FY11, and was one of the key reasons for its output falling by 2% during the year. Other factors that affected the company were extended rains and the end of a third-party mining operation in Orissa.
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The Supreme Court has allowed iron ore exports to resume, even as its final order in the case is pending. But the Karnataka government is not issuing the permits necessary for exports. Sesa Goa’s ability to actually lift the ore and start exports before the monsoon starts affecting operations will determine its performance in the short run.
Volume growth was flat on a year-on-year basis, but rose by about 39% over the December quarter. Volumes rose on a sequential basis, thanks to increased sales from the company’s other mines, an improvement in logistics capabilities and an increase in ore sales in the domestic market. In FY11, the share of domestic consumers in total sales nearly doubled to 11%.
Sesa Goa’s iron ore sales rose by 69% in value terms on a quarter-on-quarter basis to Rs 3,524 crore; this segment’s profit rose by about 76% to Rs 2,037 crore. Apart from higher volumes, higher iron ore prices, too, benefited the company.
Average international iron ore prices were up by nearly 12% sequentially in the March quarter. Its metallurgical coke and pig iron businesses, which contribute just 8% to revenue, also did well.
While Sesa Goa’s total revenue rose by 61%, expenditure rose by 48%. The chief contributors to growth in expenses were tripling of the export duty component, higher cost of materials, stores and employee costs.
Since overall expenses lagged income growth, operating profit margin improved by nearly four percentage points. But because of higher depreciation charges and higher tax incidence, profit after tax rose at a lower rate of 37% sequentially.
Besides the Karnataka factor, the trend in iron ore prices will determine the company’s performance this year. In FY11, prices had risen by about 45% since the beginning of the fiscal. In FY12, prices may not increase as much. In fact, if market conditions deteriorate, prices could decline as well.
The steel industry had recovered from the global slowdown in 2010, growing by about 13%, according to the World Steel Association data. The association expects growth to be lower at 6% in 2011, though emerging markets will grow faster.
China’s steel production may be slower in 2011 due to the government’s efforts to temper economic growth. The country is the main market for India’s iron ore exports. Due to this tepid outlook on demand, prices may at best be stable.
Graphic by Sandeep Bhatnagar/Mint
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