The government has announced policy changes on export duty on iron ore wherein replacing 15% export duty on iron ore fines with a fixed duty of Rs200/tonne. For iron ore lumps the export duty remains at earlier prevailing 15%.
For Sesa Goa, iron ore fines constitutes more than 85% of the volumes while remaining sales is for lump grade ore wherein the sales are more in domestic markets.
The company is positively impacted with the export duty changes. It would significantly reduce the export duty costs are the present year and going forward.
If there is any reversal in the fallen iron ore prices then the positive contribution from the export duty cut would be much higher.
Estimated EBITDA margins would improve by 390bps to 54.8% for FY09E and by 490bps to 48.4% for FY10E. Estimated EPS for FY09E would increase by 8.3% to Rs.25.1 and 11% to Rs.25.5 for FY10E.
However, we are maintaining for earlier price target of Rs128, which works out to be 2.27x EV/EBITDA for FY09E (against 2.5 earlier), for the time being given the continuing macro headwinds. The stock remains a BUY with an unchanged price target of Rs128.