Increased global supplies from existing mines and additional supplies from new mines globally are expected to put pressure on iron ore pricing.
About 400m tonnes of new iron ore capacities are slated to come on-line over the period 2008-2010 in comparison to 340m tonnes of corresponding increase in demand for iron ore over the same period.
We have revised our EPS estimate upward by 45.9%, 34.3% and 48.5% respectively for FY09, FY10 and FY11 respectively. Higher volume, better performance of the coke business, and lowering of effective tax rate are the prime reasons for the upward revision.
However, higher royalty, increase in freight rates and other costs should increase operating cost for Sesa by ~50% over FY08.
We are maintaining our target price of Rs210 even as our revised EPS for FY09 and FY10 are higher. Our 12-month target price is based on 6x our FY10 EPS estimate of Rs35.36 in comparison to 8.0x FY10 EPS earlier.
This is also in line with the current valuation of the peer group, which is trading at 5.7x FY10E EPS. Recent transaction multiples for acquisitions in the iron ore mining industry also signify an in-line valuation for Sesa at $10/tonne for its reserves.
As the current reserves of Sesa will last only for the next seven to eight years, we have used DCF to arrive at a fair price estimate of Rs220 by using a long term average realization of $70/tonne and a WACC of 19%.
Our estimates do not include any potential acquisition of new mines using the cash on the balance sheet.