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Sunday, Jun 26, 2005

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Sesa Goa: Buy

S. Vaidya Nathan

AN investment may be considered in the stock of Sesa Goa that trades at about Rs 580. The company's earnings for FY 06 are likely to reflect the benefit of 70 per cent hike in iron-ore prices that has been agreed to between iron ore suppliers and steel manufacturers.

Negotiated rates may, however, have a downward bias of between 15 per cent and 20 per cent across the subsequent couple of years. This would still leave prices higher by 35 per cent as compared to the contracted price for FY 05. If negotiated prices suffer a modest decline or remain flat, that would be a positive for iron ore manufacturers.

We believe that concerns of a price decline have been priced into the stock and appear to be overdone due to the high degree of uncertainty over steel price trends. We have buy recommendations outstanding on the stock at prices between Rs 375 and Rs 800. Despite the sizeable decline since our last call, we remain bullish on the stock. Gains are, however, likely to accrue in a steady manner and not compressed in a short period as was the case in 2003 and 2004.

Sesa Goa's earnings are likely to remain at robust levels over the next couple of years though the growth is likely to be moderate. Cash generation from its business operations would stay in the vicinity of Rs 500 crore (as was the case in FY 05) on a conservative basis each over the next few years. The company is well placed to step up dividend payments. The stock trades at a price-earnings multiple of less than four times its likely FY 06 earnings.

It is now trading on a cum-dividend basis. The book closure period for dividend (Rs 20 per share) is between July 13 and July 14.

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