Tad overheated

The March quarter numbers of India’s largest iron ore exporter, Sesa Goa, were slightly below expectations. Reflecting this, the company’s stock declined 0.6% to Rs 456.30 per share post results.

Consolidated total operating revenues increased 67.5% year on year to Rs 2,418.9 crore.

However, results for the March 2010 quarter are not strictly comparable with the March 2009 results as the latest quarter includes the numbers of V S Dempo and Co, which Sesa Goa acquired in June 2009.

Sesa Goa derived 90% of its revenues from the iron ore business and the rest from metallurgical coke and pig iron businesses. Increase in revenues was helped by a robust growth of 47% in sales volume to 7.4 million tonne (mt) of which, 4 mt came from Goa, 1.9 mt from Dempo and 1.5 mt from Orissa and Karnataka together.

Average price realisations increased to $67 per tonne as compared to $51 per tonne in March 2009.

Spot iron ore prices have shot up considerably (over 70%) in the last three months with contract prices settled at about $110 per tonne for the June 2010 quarter. Analysts maintain that iron ore prices do not appear sustainable at these levels. This could lead to lower contract prices in the September 2010 quarter.

Meanwhile, according to news reports, China has banned imports of ore with less than 60% iron content. Sesa Goa maintains that its sales volumes have not yet been impacted due to this development. In fact, less than 25% of the ore sold by it has iron content below 60%.

Operating performance was strong with operating profit margins expanding 730 basis points (100 basis points make one percentage point) over December 2009 quarter to 62.13%. Net profit increased 46.5% to Rs 1,212.85 crore.

At the current market price, the stock trades at 10.8 times its estimated earnings for 2011.

According to Pritam Lala, Ashish Kejriwal and Parin Kothari of B&K Securities, Sesa Goa has traded at an average one-year forward price-to-earning of 5.7 times for the last five years. “Maintain Sell with a target price of Rs 287 (7 times FY2011 earnings per share),” the three analysts wrote in a note to clients on Tuesday.