The Hindu Business Line : Sesa Goa outperforms its benchmark

Mumbai, May 2 Sesa Goa, the only major private player in the iron ore space in the country, has outperformed the BSE Metal Index by a large margin over the past week.

While the BSE-Metal Index rose by less than one per cent during that period, Sesa Goa is up by almost 24 per cent. Iron ore prices have nearly doubled over the past one year, said analysts.

“The iron ore industry is quite concentrated with only a handful of players dictating prices and Indian companies are also able to command high prices,” said Mr Rahul Singhvi, Religare Analyst.

Largest exporter

“Worldwide steel capacities are going up and on the other side, the supply of iron ore is still not able to match up,” said Mr Anmol Sekhri, Fund Manager, Bonanza Portfolio Ltd. Sesa Goa is also India’s largest private sector exporter, with overseas sales constituting more than 80 per cent of its sales volumes during 2007-08.

“Spot prices of iron ore have increased 2.5 times in the last one year. The company has taken advantage of the strong spot market and sold 55 per cent on spot basis in FY-08 against 30 per cent in FY-07,” a Motilal Oswal research report says. On the other hand, the softening of spot prices of iron ore would adversely impact earnings, the report noted.

Globally, the scenario is favourable to iron ore companies owing to rising prices, and a strong demand from China coupled with lagging global supply from iron ore majors, analysts said.

Higher prices

The standalone net profit of Sesa Goa more than trebled for the quarter ended March 31, 2008, compared with the same period a year ago.

The change in its management also seems to have boosted the company’s performance.

The London-based Vedanta Resources had acquired a controlling-stake in Sesa Goa last year.

“Aggressive management resulted in boosting up of volumes by 15-20 per cent,” said Mr Rahhul Aggarwal, PINC Research. “Their annual contracts are up for revision at higher prices, which will add to the sales and profitability to the company, and the market has already factored in this,” added Mr Aggarwal.

Even the Government policy currently has left the iron ore companies untouched, unlike in the case of steel exports, where the Government has imposed export tax.

“Rising global commodity prices (food, energy and metals) had put upward pressure on domestic prices. The contribution of basic metal prices to total inflation increased from 5.8 per cent in early 2008 to 22.2 per cent for the week-ended March 15,” a Lehman Brothers report mentions.

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