Sesa salsa

Insight

The Sesa Goa stock has been buzzing and is up 30.77% to Rs 1,551.55 in the last nine trading sessions. Among notable developments is a hike in global prices of benchmark iron ore (fines), effective from April 1, 2007.

Brazil’s Companhia Vale do Rio Doce (CVRD) and Rio Tinto, two of the three biggest iron ore producers, have settled for a 9.5% hike in the price of benchmark iron ore with Chinese (Baosteel group, China’s largest steelmaker) and Korean steel producers.

This hike follows a 19% hike that took place last year (for 2006-07) besides a 71.5% hike in benchmark prices in 2005-06.

The firm demand and increased output of steel in China and other Asian countries are seen as the key reason for the hike in ore prices.

Incidentally, this time the Chinese companies have taken the lead to strike a deal with mining companies as regards the price for iron ore.

Earlier, it was the Japanese and European companies that took the initiative. And usually, once the first big deal is through, the other players tend to follow.

The significance of China in the global steel industry has increased since the country now accounts for a third of global steel output and is among the biggest importer of iron ore (320 million tons estimated for 2006). And China’s steel output is estimated to rise at a healthy rate over the next 4-5 years.

For Sesa Goa (83.3% of revenues accrue from sale of iron ore), which largely supplies fines and lumps (60% of its total iron ore sales accrue from exports to China and Taiwan), the hike is expected to be lower as the overall quality of its iron ore is relatively lower; analysts say that Sesa may have to settle for a hike of 7-8%.

Another key factor for the rise in Sesa Goa’s stock price is the news about a possible change of guard.

Its Japanese promoter, Mitsui & Co (51% stake), is reportedly planning to exit the business.

Analysts have pegged the company’s value at around Rs 8,000 crore. This works out a little over Rs 2,000 per share.

And what does the buyer get? Sesa Goa’s estimated iron ore reserves of 150 million tons (15-16 years of production at current 9-10 million tons annual output), a debt free company, cash surplus of nearly Rs 500 crore (as on March 2006), operating margins of 47% (last two years), current year’s estimated consolidated net profit of Rs 550-600 crore and two new mines in Jharkhand (to come up over next two years); the net value thus works out to less than Rs 7,000 crore for the buyer.

But what if there is no deal? At Rs 1,551.35, the stock trades at a PE of about 9.5 times its estimated EPS of Rs 162 for 2007-08 (estimated EPS for 2006-07 is Rs 140). While there are no strict comparisons, the valuations appear to be fair.

Logistics logic

The stock of Allcargo Global Logistics touched an all-time high of Rs 1,285.20 after the company announced its decision to acquire Hindustan Cargo, a wholly owned subsidiary of Thomas Cook and engaged in the business of air freight and logistics, for Rs 8.91 crore.

Allcargo is a Multimodal Transport Operator (MTO) offering end-to-end logistics services for export and import cargo. It also has presence in both LCL (less than container load) as well as FCL (full container load).

It is a formidable player in the ocean freight business and with this acquisition; Allcargo is equipped to offer an assortment of services in the freight division, as it adds air freight services.

Allcargo operates a state-of-the-art container freight station (CFS) at JNPT with a capacity to handle 120,000 containers (20-feet equivalent). The contribution from this segment is expected to increase on account of capacity expansions and setting up of green-field CFS at Chennai and Mundra and rail linked inland container depot at Delhi.

Add to it the higher margins at JNPT as compared to CFS operations at other places in India; Allcargo is well poised to benefit from this segment and narrowing the gap in this segment, with its competitor Gateway Distriparks.

Earlier, in June 2006, Allcargo acquired ECU Line, one of the leading global non-vessel owning company carrier (NVOCC) players.

ECU has 120 offices in 56 countries and franchisees and agents at 203 locations in 126 countries and catering to over 4,000 destinations; this is expected to add significantly to the company’s revenues.

ECU has strong presence in the high margin markets of Europe, Latin America, and Africa and on the cards are plans of expanding operations, in the high volume markets of USA and China.

It is interesting to note that Allcargo’s business is dependent on shipping lines. It is in a good bargaining position with the shipping lines as its combined total space requirements on ships will be bought as a common platform from Hong Kong resulting in greater discounts.

Also, MTO business buys containers from shipping lines whereas CFS depends on shipping lines to boost the handling of container volumes, resulting in a unique business model.

The stock has appreciated by 15.1% since the announcement on January 2nd 2007. At Rs 1,223, it trades at a PE of 15 times its estimated earnings for the year ending December 2008.

In the backdrop of strong macroeconomic parameters, the containerized trade may grow at a CAGR of 14-16% and being a major player, Allcargo merits attention at declines.

Contributed by Vishal Chhabria and Devangi Bhuta