For 4QFY2009, Sesa Goa posted 15% y-o-y de-growth in consolidated topline to Rs1,429 crore (Rs1,681cr) mainly on account of the sharp decline in the prices of iron ore, met coke and pig iron.
Notably, realizations fell by 17%, 8% and 13% y-o-y for iron ore, met coke and pig iron, respectively. Dismal volume growth of 0.4% for iron ore and 30% y-o-y decline in met coke volumes also impacted topline growth.
However, for FY2009, SGL reported consolidated revenue growth of 29.7% to Rs4,959 crore (Rs3,823cr) on account of iron ore volume growth of 22% to 15.1mn tonnes and higher iron ore realization by 9%.
The fall in revenues and sharp decline in margins, resulted in the company reporting a 32.5% y-o-y decline in net profit to Rs548 crore (Rs812cr).
Other income, which increased by a substantial 38% to Rs70.3cr (Rs51.0cr) mainly due to higher interest and dividend income on higher investments, supported the bottomline fall.
For FY2009, the company’s net profit increased by 29% y-o-y to Rs1,988 crore (Rs1,542cr) due to the strong iron ore volumes and prices during 1HFY2009.
Worldwide Iron ore contract negotiations for FY2010 are currently progressing. Negotiations signal weak iron ore prices at 30-40% lower levels owing to the slowdown in steel demand globally and especially in China.
The spot iron ore prices in China have also collapsed by more than 65% to $64 from the peak of $186 during July 2008.
We estimate the Australian FOB iron ore fines contract price to be 30% lower y-o-y at $64/tonne in FY2010.
At Rs115, SGL is trading at a P/E of 6.9x and EV/EBIDTA of 2.6x FY2010E earnings. In the last down-cycle, SGL traded at an average EV/EBIDTA of 2-3x. However, in the last five years, SGL traded at an average EV/EBIDTA of 3-4x.
Historically, the stock has been trading in a wide valuation band depending on the industry cycle.
Nonetheless, we believe that SGL is most insulated from the current downturn considering its zero debt and strong cash balance of Rs4,140 crore (Rs53/share).
We assign the average downcycle EV/EBIDTA of 2.5x to SGL and arrive at a fair value of Rs112. We remain NEUTRAL on Sesa Goa.