sesa goa motilal

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Sesa Goa

Base ReportSECTOR: METALS

Growth UnfoldingMore oreSanjay Jain ([email protected]); Tel: +91 22 3982 5412

Ashutosh Somani ([email protected]);Tel:+9122 3982 5425


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219 February 2008

Sesa Goa

Contents

Page No.

Beneficiary of strong iron ore prices .............................................................. 4-6

Iron ore prices: Outlook positive .................................................................. 7-17

Strong coke prices to drive up margins ........................................................18-19

Valuations attractive; Buy ...........................................................................20-21

Company background .................................................................................. 22-26

Financial statements ....................................................................................27-30


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STOCK DATA

52-Week Range (H/L Rs) 3,969/1,485

Major Shareholders (as of December 2007) (%)

Promoters 51.2

Domestic Institutions 13.0

FII/FDIs 18.6

Public 17.3

Average Daily Turnover

Volume ('000 shares) 329.2

Value (Rs million) 722.71/6/12 Month Rel. Performance (%) 9/68/49

1/6/12 Month Abs. Performance (%) 4/96/75

Sesa Goa

KEY FINANCIALS

Shares Outstanding (m) 39.4

Market Cap (Rs b) 131.3

Market Cap (US$ b) 3.3

Past 3 yrs. Sales Growth (%) 45.7

Past 3 yrs. NP Growth (%) 183.5

Dividend Payout (%) 31.4

Dividend Yield (%) 1.2

Y/E MARCH 2007 2008E 2009E 2010E

Net Sales (Rs m) 22,242 33,567 47,943 50,798

EBITDA (Rs m) 9,684 17,402 26,874 26,729

NP (Rs m) 6,475 11,885 18,505 18,843

EPS (Rs) 164.5 301.9 470.1 478.7

EPS Growth (%) 13.3 83.6 55.7 1.8

BV/Share (Rs) 409 668 1,096 1,536

P/E (x) 20.3 11.0 7.1 7.0

P/BV (x) 8.2 5.0 3.0 2.2

EV/Sales (x) 5.5 3.4 2.1 1.7

EV/EBITDA (x) 12.7 6.6 3.8 3.2

RoE (%) 40.2 45.2 42.9 31.2

RoCE (%) 54.9 62.3 59.9 42.8

RoIC (%) 77.7 103.3 124.4 115.8

STOCK PERFORMANCE (1 YEAR)

319 February 2008

Base ReportSECTOR: METALS

Buy

Initiating Coverage Rs3,336

BLOOMBERG

SESA IN

REUTERS CODE

SESA.BO

19 February 2008STOCK INFO.

BSE Sensex: 18,076

S&P CNX: 5,281

Beneficiary of strong iron ore prices: Global iron ore prices have

been trending up over the last few years. Given the strong demand

from China and lagging supplies from the three consolidated global

miners, we expect global iron ore prices to continue moving up. Sesa

Goa is Indias largest private iron ore miner, with reserves of over

207m ton. It is aggressively ramping up production to capitalize on the

rising price trend.

Strong coke prices to drive up margins: Increasing global steel

production has also been driving up demand for coke. China, a dominant

exporter of coke, has increased the export duty on coke from 15% to

25% in January 2008. As a result, prices of coke have increased to an

all-time high. Sesa Goa imports coking coal for the manufacture of

coke. While its cost of coking coal is fixed through long-term contracts,

it sells coke at spot prices. Strong coke prices would, therefore, drive

up margins.

Low operating costs: Operating costs are low as two-thirds of Sesa

Goas mining operations are located in Goa, in close proximity to the

seaport. Ore is transported in barges through rivers to its trans-shipper

for loading on outgoing ships. The company has deployed its own railway

wagons in Orissa to minimize inland transportation costs.

Valuations attractive; Buy: The stock is trading at 7.1x FY09E EPS

and an EV of 3.8x FY09E EBITDA. Sesa Goa has surplus cash of

~Rs16b (Rs406/share, based on March 2008 estimates). We initiate

coverage with a target price of Rs4,677 (EV/EBITDA of 6.5x FY09E).

Earnings CAGR of 37% over FY07-10 would drive a re-rating. Buy.

1,400

2,050

2,700

3,350

4,000

Feb-07 May-07 Aug-07 Nov-07 Feb-08

-25

0

25

50

75Sesa Goa Rel. to Sensex (%) - RHS


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419 February 2008

Sesa Goa

Beneficiary of strong iron ore prices

Global iron ore prices have been trending up over the last few years. Given the strong

demand from China and lagging supplies from the three consolidated global miners, we

expect global iron ore prices to continue moving up. Sesa Goa is Indias largest private

iron ore miner, with reserves of over 207m ton. It is aggressively ramping up production to

capitalize on the rising price trend.

Global prices of iron ore have moved up sharply

Iron ore prices have moved up sharply in the last six months in the spot market. The prices

have been driven by: (1) continued strong demand from the largest consumer of iron ore

China, which constitutes ~45% of the total global iron ore trade; (2) high ocean freight

due to shortage of ships and port congestion; and (3) limited supply growth in the international

market due to infrastructure bottlenecks and consolidation of miners.

IRON ORE SPOT PRICES (US$/TON)

Source: Motilal Oswal Securities

Indias iron ore exports are witnessing robust growth

India has mineable reserves of over 7b ton of iron ore 7b ton of hematite and 58m ton of

magnetite. Over the period 2000-2006, Indias iron ore exports have grown at a CAGR of

19.3%. Exports to China have grown at a much faster rate of 38%.

INDIA: IRON ORE PRODUCTION AND EXPORTS (M TON)

2000 2001 2002 2003 2004 2005 2006 CAGR (%)

Production 75 79 80 106 121 140 165 14.0

Exports 33 41 55 58 68 85 95 19.3

to China 11 14 25 32 50 69 76 38.0

to Others 22 27 30 26 18 16 19 (2.4)

Source: Industry

30

80

130

180

230

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Chinese cfr spot price Indian fob spot price

3 key drivers of iron ore

prices globally

Indias iron ore exports have

grown at 19.3% CAGR

2000-2006


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519 February 2008

Sesa Goa

aided by the logistics advantage that it enjoys

The ongoing global supply demand dynamics for iron ore have resulted in a phenomenal

change in ocean freight. A few years ago, freight from Brazil to China used to be US$30-

35/ton. It is now as high as US$70-80/ton. Similarly, the freight from India to China has

moved from US$15-18/ton to US$35-50/ton, and the freight differential has risen from

just US$15/ton to US$40/ton. Strong demand from China and rising freight differential

vis--vis Brazil has resulted in a much higher fob realization for Indian miners and driven

exports from India.

INDIAN IRON ORE MINERS

COMPANY TYPE OF FY06 REGI ON

M I N I N G (MTONS )

Steel Authority of India Captive 24 Chhatisgarh, Orissa, Jharkhand

Tata Steel Captive 8.5 Jharkhand

JSW Steel Captive 2.0 Karnataka

Jindal steel and Power Captive 4.5 Orissa

National Mineral Development Corp. PSU 22.3 Chhatisgarh, Karnataka

Orissa Mineral Development Corp. PSU 6.0 Orissa

Essel Mining Private 6.2 Orissa

Rungta mines Private 2.0 Orissa

MSPL Private 2.3 Karnataka

Sesa Goa Private 9.8 Goa, Karnataka, OrissaDempo Private 4.0 Goa

VMSalgaocar Private 4.0 Goa

Chowgule Private 3.0 Goa

SMI Private 3.0 Goa

Timblo Private 3.9 Goa

Fomento Private 2.0 Goa

KMMI Private 1.5 Goa, Hospet

Chowgule Private 1.5 Goa

PSU: Public Sector Undertaking Source: Motilal Oswal Securities

Export duty of Rs300/ton on high grade ore, not a dampener

Conceding to the demand of steel industry, the Indian government imposed an export duty

of Rs300/ton with effect from 1 March 2007 on high grade iron ore. The duty on lower

grade iron ore is Rs50/ton. The royalties on iron ore mining are low in India, as shown

below:

INDIA: ROYALTY AND EXPORT DUTY ON IRON ORE

FE CONTENT ROYALTY (7RS/TON) EXPORT DUTY

(%) LUMPS FINES

>65 27 19 300

62-65 16 11 300


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619 February 2008

Sesa Goa

Sesa Goa Indias largest private miner

Sesa Goa is the largest private miner in India and the only listed iron ore mining company

in the country. It has rich iron ore reserves of 207m ton in the states of Goa, Karnataka

and Orissa. To capitalize on the strong iron ore prices, Sesa is ramping up production from

10.5m ton in FY07 to ~12m ton in FY08 and to 14-15m ton in FY09 through de-bottlenecking

and a change in management practices.

Sesa has tied up sales through long-term contracts, which constitute nearly 76% of sales

while 24% sales are on spot basis. Spot sales are likely to increase to 70% in FY09 and

the higher realizations in the spot market would drive earnings ahead.

SESA GOA: IRON ORE MINES

STATE PROCESSING PLANT (M TPA) MI NES

Goa 8.8 Condli, Sonshi, Others

Karnataka 2.1 Narrain Mines, Chitradurga, Karadikola mine, Hospet

Orissa 4.1 Thakurani Mine

Source: Company

with low operating costs

Two-thirds of Sesa Goas mining operations are located in Goa. Goas iron ore is medium

grade and easy to extract, without blasting and crushing. Iron ore in states like Karnataka

and Orissa is of high grade and in rocky form; extraction requires blasting and crushing.

Hence, mining costs in Goa are relatively lower. Also, Goa offers close proximity to the

seaport and has two rivers, which flow into the sea. These rivers are useful media for

transportation of bulk materials.

Fob (free on board) cost of iron ore in Goa is the lowest due to easy extraction and low

inland transportation cost. Sesa owns 15 barges and a transshipper with total capacity of

80,000 ton in Goa. Iron ore from its mines is transported in barges through rivers to its

transshipper for loading on outgoing ships.

Sesas mines in Orissa and Karnataka are located 400-600 km away from the port. Inland

transportation costs are higher due to poor infrastructure and low availability of railway

rakes. However, the ore in these two states is qualitatively of a high grade and attracts far

higher prices. To bring down its transportation costs, Sesa has invested in Indian Railways

Own Your Wagon Investment Scheme (WIS) which ensures availability of rake as well as

~10% discount. Thus, Sesas overall fob cost of iron ore is one of the lowest, and margins,

one of the highest.

Sesa Goa is Indias largest

private miner

Sesa has the

additional advantage

of low operating costs


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719 February 2008

Sesa Goa

Iron ore prices: Outlook positive

Iron ore prices have moved up sharply in the last six months in the spot market. The prices

have been driven by: (1) continued strong demand from the largest consumer of iron ore

i.e. China, constituting ~45 % of the total global trades; (2) high ocean freight due to

shortage of ships and port congestion; and (3) limited supply growth in the international

market due to infrastructure bottlenecks and consolidation of miners.

China is heavily dependent on iron ore for steel production

Steel is produced primarily from recycling steel scrap and iron ore while the latter accounts

for two-thirds the global production of crude steel. Scrap is largely generated in developed

nations, which are well equipped with infrastructure and utilize a greater share of consumer

durables, autos, white goods and other lifestyle products that have smaller life cycles of

around five years. Scrap generation in these countries ranges from 50-70% of their annual

consumption.

Developing nations on the other hand, such as the BRIC countries (Brazil, Russia, India

and China) are currently building infrastructure (where steel gets embedded for next 50-100 years), and hence generate lower amounts of steel scrap, ranging between 15-20% of

their annual consumption. Accordingly, the developed nations use the electric furnace

route to consume locally available steel scrap while developing countries have to depend

largely on the blast furnace route to convert iron into pig iron (also called hot metal).

CHINA IS DRIVING THE GLOBAL PIG IRON PRODUCTION (M TONS)

300

475

650

825

1,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Other countries China

CAGR (2000-07) =0.6%

CAGR (2000-07) =20%


During 2000-2007, pig iron production in China grew at 20% CAGR while it was merely

0.6%.in the rest of the world. China is primarily dependent on pig iron for crude steel

production due to poor availability of scrap. Therefore it is heavily dependent on iron ore


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819 February 2008

Sesa Goa

CHINESE PIG IRON PRODUCTION HAS DRIVEN OCEAN TRADE OF IRON ORE (M TONS)

2001 2002 2003 2004 2005 2006 2007E 2010E CAGR (%)

(01-06) (06-10)

RoW 360 372 389 395 400 405 410 440 2 2

China 92 112 148 208 270 326 375 450 29 8

Total 452 484 537 603 670 731 785 890 10 5


for steel production. Pig iron production in China is driving demand for iron ore. The iron

content in the ore available in China is of inferior grade i.e. 33% Fe grade v/s 60-65% Fe

grade available in Australia, Brazil, India and South Africa. Hence the ore needs to be

upgraded (i.e. beneficiated, an expensive process) and then blended with the high-grade

imports. China's import of iron ore has grown even faster at 29% CAGR over 2001-2006.

Chinese ore is low grade

China's production of iron ore too has grown rapidly to meet its country's requirements.

However, according to recent reports, China has been mining ore that has as low as 10%

Fe content.

This is because China is finding it tough to get incremental supply. Such mining operationshave led to a further decline in average Fe content to ~28% from 33%. More interestingly,

local production of iron ore has stagnated in the second half of 2007.

CHINA'S LOCAL PRODUCTION OF IRON ORE STAGNATED IN 2HCY07(M TONS / MONTH)

10

25

40

55

70

Feb-04

Apr-04

Jun-04

Aug-04

Oct-04

Dec-04

Feb-05

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

Feb-06

Apr-06

Jun-06

Aug-06

Oct-06

Dec-06

Feb-07

Apr-07

Jun-07

Aug-07

Oct-07

Dec-07


Higher pig iron production

in China is driving demand

for iron ore

However, iron ore mined in

China is of poor quality


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919 February 2008

Sesa Goa

GLOBAL PRODUCTION OF IRON ORE (M TONS)

SR. COU NTRI ES MI NE PRODUCTION RESERVES RESERVE BASE M INE L IFE

N O. 2003 2004 2005 2006E M TONS FE(%) M TON S FE(%) YEARS*

1 Brazil 212 220 280 300 23,000 70 61,000 67 77

2 Russia 92 95 97 105 25,000 56 56,000 55 238

3 Australia 187 220 262 270 15,000 59 40,000 63 56

4 Ukraine 62 66 69 73 30,000 30 68,000 29 411

5 China 261 280 420 520 21,000 33 46,000 33 40

6 Kazakhstan 17 17 16 15 8,300 40 19,000 39 553

7 India 106 110 140 150 6,600 64 9,800 63 44

8 Sweden 22 22 23 24 3,500 63 7,800 64 146

9 United States 46 54 54 54 6,900 30 15,000 31 12810 Venezuela 18 18 20 20 4,000 60 6,000 60 200

11 Canada 31 31 30 33 1,700 65 3,900 64 52

12 Iran 16 16 19 20 1,800 56 2,500 60 90

13 South Africa 38 40 40 40 1,000 65 2,300 65 25

14 Mauritania 10 10 11 11 700 57 1,500 67 64

15 Mexico 11 12 12 13 700 57 1,500 60 54

16 Other Countries 34 40 42 43 11,000 56 30,000 57 256

World Total 1,163 1,251 1,535 1,691 160,200 49 370,300 49 95

* Calculated by dividing production in 2006 Source: US Geological Survey Summary 2007

Reserves: That part of the reserve base which could be economically extracted or produced at the time of determination. The term 'reserves'

need not signify that extraction facilities are in place and operative. Reserves include only recoverable materials; thus, terms such as

'extractable reserves' and recoverable reserves' are redundant and are not a part of this classification system.Reserve base: That part of an identified resource that meets specified minimum physical and chemical criteria related to current mining and

production practices, including those for grade, quality, thickness, and depth. The reserve base is the in-place demonstrated (measured plus

indicated) resource from which reserves are estimated. It may encompass those parts of the resources that have a reasonable potential for

becoming economically available within planning horizons beyond those that assume proven technology and current economics. The reserve

base includes those resources that are currently economic (reserves), marginally economic (marginal reserves), and some of those that are

currently subeconomic (subeconomic resources). The term "geologic reserve" has been applied by others generally to the reserve-base

category, but it also may include the inferred-reserve-base category; it is not a part of this classification system.

Supplies of substitute (scrap) too is declining

Supplies of steel scrap in global trade declined 4% to 90m tons in 2006 due to rising

consumption in Germany and Russia, that are among the top four exporters in the world.

Supply of steel scrap worsened further in 2007. Steel scrap exports from Russia, UK,

Japan and Germany declined 20%, 19%, 15% and 8% respectively in first nine months

during 2007.

Global suppliers are gearing up to cater to China

Prices of iron ore have risen sharply in the last five years driven by rapid demand growth

from China. A large number of mining expansion projects have been lined up by the big

three miners (CVRD, Rio Tinto and BHP-Billiton) to augment supplies. Also, CSN and

FMG (Fortescue Metal Group) have been investing in expansion of their mines in Brazil

and Australia respectively. CSN's mine, Casa de Pedra is being expanded from 16m tpa

capacity to 53m tpa capacity in phases. FMG, a new miner in Australia, is currently

undertaking a new project of 100m tpa capacity. The first phase of 41m tpa of new

capacity is likely to come on stream in early 2008.

Hence iron ore prices are up

sharply and global suppliers

are upping their ante to

cater to China


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1019 February 2008

Sesa Goa

SCRAP EXPORTERS

SN COU N TRY 2005 2006 YOY SHARE 9M2005 9M2006 YOY 9M2007 YOY

M TONS M TON S (%) (%) M T ON S M TON S (%) M TON S (%)

1 USA 13.0 14.0 8 16 10.0 10.8 8 12.3 14

2 Russia 12.3 9.6 -22 11 9.2 7.4 -20 5.9 -20

3 Japan 7.6 7.7 1 9 5.6 5.9 5 5.0 -15

4 Germany 7.8 7.6 -2 8 5.8 6.3 9 5.8 -8

5 UK 6.1 7.4 21 8 4.9 5.2 6 4.2 -19

6 France 5.0 5.8 16 6 3.7 4.5 22 4.4 -2

Others 42.0 37.9 -10 42 39.2 40.1 2.3 37.6 -6.2

Total 94 90 -4 100

SCRAP IMPORTERS

SN COU N TRY 2005 2006 YOY SHARE 9M2005 9M2006 YOY 9M2007 YOY

M TONS M TON S (%) (%) M T ON S M TON S (%) M TON S (%)

1 Turkey 13.1 14.5 11 16 7.9 9.7 23 10.0 3

2 Spain 7.1 7.7 9 9 5.2 5.6 8 4.8 -14

3 Italy 5.4 5.7 5 6 3.9 4.1 5 3.9 -5

4 South Korea 6.7 5.6 -17 6 5.0 4.1 -18 5.0 22

5 Germany 5.5 5.4 -2 6 4.2 4.4 5 4.5 2

6 China 10.9 5.8 -47 6 8.1 4.6 -43 2.4 -48

Others 45.0 45.3 1 50 34.3 32.5 -5.2 30.6 -5.8

Total 94 90 -4 100


We are assuming that exports from India will not rise above 95m tons based on imposition

of export tax of US$6.75 per ton, effective 1 March 2007. Production of pig iron will rise

in Brazil, Russia and India but the incremental demand for iron ore will be met from

captive mines and domestic miners. Hence we believe the incremental iron ore volumes

in global trade will try to meet the demand of Chinese steel producers. Currently the iron

ore supply situation remains tight, as only 62m ton of incremental supply came in 2007.

We note that substantial new supplies of 124m ton would be available in 2008 going by the

number of expansions planned by the big three miners, CSN and FMG..

IRON ORE SUPPLY MAIN MINERS (M TONS)

2005 2006 2007 2008E 2009E 2010E

Vale 255 276 300 322 329 359

Rio Tinto 148 152 179 217 220 231

BHP-Billiton 114 114 125 145 147 170

India 140 165 165 165 165 165

Kumba 32 33 34 35 40 45

CSN (Casa de pedra) 15 16 23 37 44 49

FMG 30 60 100

Total 704 756 825 950 1,004 1,119

Change (% YoY) 81 51 69 125 54 115

Source: Annual Reports of respective companies/MOSl

We believe incremental iron

ore volumes in global trade

will meet Chinese steel

producers demand


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1119 February 2008

Sesa Goa

Global miners that are gearing up iron ore production

VALE in Brazil produces iron ore and pellets through two integrated mine-railway-port

systems - the southern and northern systems. The southern system's Itabira mines started

in 1942 and has reserves of 3b ton. Ore production from Itabira (100m tpa) is transported

905km by rail to Porto Tubarao. The Carajas ore bed in the northern system has reserves

of 1.5b ton of high-grade hematite. Ore production from Carajas (70m tpa) is transported

892km by rail to the Ponta da Madeira Maritime Terminal. CVRD has undertaken the

following projects:

? Fabrica capacity to rise from 15m tpa to 20m tpa in 2007

? Fazendao would add 14m tpa capacity in 2007? Itabira would add 3m tpa capacity in 2007

? Carajas 100m tpa to add 15m tpa in 2007, capacity will be raised further to 130m tpa

by 2010

? Brucutu capacity will rise from 13m tpa in 2006 to 23m tpa in 2007 and 30m tpa in

2008

? Fabrica would add 5m tpa in 2007

? These projects will generate new capacities of 52m tpa in 2007

? Andrade and Pico in 2008

? Southern system greenfield project in 2010

Rio Tinto

? US$290m investment into expansion of Hamersley Iron's Marandoo mines and new

mine capacity at Nammuldi (completed in 2006) and Tom Price (was in 1Q2007).

US$200m investment in doubling of 100km rail link has been completed.

? US$530m investment for expanding the Yandicoogina mine from 36m tpa capacity in

2005 to 52m tpa by 3Q2007. US$803m investment to increase the capacity of Dampier

port from 116m tpa to 140m tpa by end-2007.

? US$980m investment in Hope Down (50% share in mine and 100% in infrastructure)

will add new 22m tpa capacity by early 2008.

BHP-Billiton is undertaking iron ore expansion projects at Western Australia Iron Ore

? US$575m RGP2 added 8m tpa by 2HCY06

? RGP3 added 20m tpa by 4QCY07, capacity has risen to 129mt

? RGP4 to add 23m tpa by 1HCY10, capacity to rise to 152mt

In addition, minority holding of Mitsui accounts for 24mtpa of capacity. Therefore, total

capacity under control would be 176mt.

Kumba Iron Ore in South Africa will expand its iron ore production from the current

32m tpa to 42m tpa by 2009 and to 70m tpa by 2015.


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1219 February 2008

Sesa Goa

OLIGOPOLY OF MINERS

SE AB ORN E T RA DE : 4 2 7M TON S ( TH REE M AJ O R' S SH AR E: 4 6 %) SE AB ORN E T RA DE : 8 2 5M TO NS ( TH REE M AJ O R' S SH AR E: 8 0 %)


1998

Samitri

3%

Samarco

3%

Fertec

3%MBR

5%QC

2%

Rove River

7%

IOC

2%

BHP

14%

India

7%

Others

22%

VALE

20%

Hamersley

12%

GIIC

0%

2007

Kumba

3%

VALE

42%

Rio Tinto

24%

BHP Billiton

14%

India

11%Others

6%

CSN's Casa de Pedra mine in Brazil is expanding from 16m tpa currently to 53m tpa by

2010 at a capex of US$919m.

LKAB in Sweden will raise capacity of iron ore production from 23m tpa currently to

25m tpa by 2007 and to 30m tpa by 2008.

FMG (Fortescue Metal Group) in Australia, US$2.5b project with initial capacity of

45m tpa is likely to get commissioned by 1Q2008. The project would be further ramped up

to the capacity of 100m tpa by 2010 and 150m tpa by 2015 depending on demand.

Others

Most of the other mines in world would be ramped up either by steel producers for their

captive consumption or by Chinese miners for domestic consumption.

Oligopoly of miners keeps supply side discipline

Australia, Brazil, India and South Africa are the main suppliers of high-grade iron ore to

steel producers globally. Owing to geographical proximity, Europe and America have been

sourcing iron ore largely from Brazil. Other suppliers to Europe and America are Canada

and Sweden. Japan, Korea and China have been sourcing iron ore from Australia, SouthAfrica and India. Iron ore miners have consolidated operations in the last ten years and

today three players have 80% share of the global iron ore trade.

Oligopoly of miners keeps a

tight leash on supplies


13/32

1319 February 2008

Sesa Goa

80

40

30

5

5

IRON

OREIMPORTS/EXPORTS;FREIGHT

RATES

China

Iron

oreExports

Neg

lig

ible

Iron

oreImports

Aus

tra

lia

127

.2

Braz

il

76

.4

India

74

.8

S

Amer

ica

9.7

NAFTA

4.9

Su

b

Sa

haran

Africa

12

.8

Other

5.6

Total

326.3

CIS

Iron

oreExports

China

2.7

Europe

17

.4

CIS

2.2

Others

1.4

Total

23.7

Iron

oreImports

CIS

10

.1

Other

0.1

Total

10.2

Europe

Iron

oreExports

Europe

40

.1

ME/N

Africa

3.7

Other

0.5

Total

44.4

Iron

oreImports

Braz

il

86

.0

CIS

27

.0

NAFTA

17

.9

Europe

15

.0

Aus

tra

lia

9.6

India

1.0

S

Amer

ica

3.5

Su

b

Sa

haran

Africa

7.8

ME/N

Africa

10

.8

Total

178.6

NAFTA

Iron

oreExports

NAFTA

14

.1

Europe

11

China

5.2

ME/N

Africa

1.6

Japan

1.4

SE

As

ia

1.4

Aus

tra

lia

1.1

Other

0.7

Total

36.6

Iron

oreImpor

ts

Braz

il

7.4

NAFTA

14

.1

S

Amer

ica

1.4

Other

0.1

Total

22.9

Brazil

Iron

oreExp

orts

China

81

.3

Europe

73

.9

Japan

32

.6

SE

As

ia

22

.9

Middle

East

&

N

Africa

11

.1

S

Amer

ica

10

.8

NAFTA

7.8

Other

2.3

To

tal

242

.6

Iron

oreImp

orts

Neg

lig

ible

India

Iron

oreExports

China

53

.6

Japan

5.9

SE

As

ia

1.4

Europe

0.9

Other

0.8

Total

62.6

Iron

oreImports

Neg

lig

ible

Japan

Iron

oreExports

Neg

lig

ible

Iron

oreImports

Aus

tra

lia

80

.1

Braz

il

30

.5

India

9.5

S

Africa

5.3

SE

As

ia

5.1

NAFTA

1.5

Total

1

34.3

Australia

Iron

oreExports

China

128

.2

Japan

7

4.6

SE

As

ia

3

6.1

Europe

9.0

Other

0.3

Total

248.1

Iron

oreImports

Ocean

ia

2.0

SE

As

ia

1.4

NAFTA

1.3

Braz

il

0.4

Total

5.2

SE

Asia

Iron

oreExportsIron

oreImports

China

1.9

Aus

tra

lia

36

.9

Europe

0.5

Braz

il

18

.5

Other

0.2

India

1.7

S

Ame

rica

1.7

NAFTA

1.6

Su

bSa

haran

Africa

1.4

Other

0.8

Total

2.6

Total

62.5

Freight

USD/ton

Source:Company


14/32

1419 February 2008

Sesa Goa

CHINAS RISING DEPENDENCE ON FAR OFF IRON ORE SUPPLIERS

SOU RCE 2004 SHARE 2005 SHARE YOY 2006 SHARE YOY 2007 SHARE YOY

(000 TONS) (%) (%) (%) (%) (%) (%) (%)

Australia 78,137 37.6 112,178 40.8 43.6 126,821 38.9 13.1 145,651 38.0 14.8

Brazil 46,035 22.1 54,714 19.9 18.9 76,421 23.4 39.7 98,022 25.6 28.3

India 50,172 24.1 68,553 24.9 36.6 74,753 22.9 9.0 79,540 20.7 6.4

S.Africa 11,099 5.3 10,552 3.8 -4.9 12,559 3.8 19.0 12,229 3.2 -2.6

Canada 2,800 1.3 2,786 1.0 -0.5 3,873 1.2 39.0 5,932 1.5 53.2

Russia 2,076 1.0 4,283 1.6 106.3 2,725 0.8 -36.4 5,400 1.4 98.2

Others 17,761 8.5 22,194 8.1 25.0 29,171 8.9 31.4 36,844 9.6 26.3

Total 208,080 100.0 275,260 100.0 32.3 326,323 100.0 18.6 383,618 100.0 17.6

Source: Chinas Customs Statistics

These three miners (VALE, BHP-Billiton and Rio Tinto) supply iron ore via long term

contracts while the prices are negotiated annually. Though, the prices of iron ore differ

from one mine to another depending upon grade and location. There is a common practice

of benchmarking these contracts to a negotiated increase in percent. We note prices have

gone up year after year driven by demand.

IRON ORE ANNUAL BENCHMARK CONTRACT PRICE HIKES

-30

0

30

60

90

120

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Change (%, YoY) lumps (US /dmtu) Fines (US /dmtu)

Source: Industry

Rising Chinese imports of iron ore from Brazil has driven shipping demand manyfold as it

takes twice longer to ship one ton of iron ore from Brazil to China versus Australia to

China. Port congestion has further aggravated the problem and sea freight is on the run,

which is evident from the following graph.

Iron ore is supplied via

long term contracts with

the prices being

negotiated annually

Chinas import of ore from

Brazil has driven shipping

demand multifold

Rising dependence on distant Brazil has aggravated sea logistics

Rapid growth in Chinese consumption has forced the steel mills to increasingly look to

distant locations like Brazil and South Africa. The imports from Brazil have grown rapidly

in the last two years due to insufficient supply growth from nearby Australia and India.


15/32

1519 February 2008

Sesa Goa

Note: Baltic Dry Bulk Index Source: Bloomberg

Indian miners benefit from proximity to China due to rising freightdifferential

The factors stated above have resulted in a phenomenal change in ocean freight. A few

years ago, freight which used to be US$30-35/ton from Brazil to China is now as high as

US$70-80/ton. Similarly, the freight from India to China has moved from US$15-18/ton to

US$35-50/ton now and the freight differential has moved up from just US$15/ton to US$40/

ton.

Strong demand from China and rising freight differential with Brazil has resulted in a

much higher f.o.b. realization for Indian miners and driven exports out of India.

INDIAN EXPORTS OF IRON ORE TO CHIN A HAVE GROWN RAPIDLY

2001 2002 2003 2004 2005 2006 CAGR (%)

(00-06)

Production 79 80 106 121 140 165 14.0

Exports 41 55 58 68 85 95 19.3to China 14 25 32 50 69 76 38.0

to Others 27 30 26 18 16 19 (2.4)

Source: Industry

India has rich iron ore reserves

Magnetite ore is found in the Western Ghats of India which is an ecologically sensitive

area. Mining in the area has already been halted by a court order and magnetite ore is no

more available from this location. Currently, India has mineable reserves of 7b ton of

hematite and 0.058b ton of magnetite i.e. a total of 7.05 8b ton.

0

3,000

6,000

9,000

12,000

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

SEA FREIGHTS PUSHING UP COSTS FOR CHINESE

Indian miners will benefit

from geographic proximity

to China

Further, India boasts rich

iron ore reserves


16/32

1619 February 2008

Sesa Goa

IRON ORE RESERVES AND RESOURCES

TYPE M TONS

Hematite 14.63

Magnetite 10.60

Total 25.23

Source: IBM, as per UN classification of reserves on 1 April 2005

Indian merchant miners have fuelled production to cater to China

Captive production of iron ore has been low because production growth at steel producers

viz. SAIL, Tata Steel, JSW Steel and JSPL has been poor. However, merchant mining of

iron ore has grown sharply at a CAGR of 20% in the last five years.

PRODUCTION (MTPA)

FY01 FY02 FY03 FY04 FY05 CAGR (%)

Captive 28.7 28.0 30.0 33.5 35.0 5

Merchant 52.1 58.2 69.1 89.3 107.7 20

Source: Industry

Supported by merchant mining, exports have grown sharply at a CAGR of 19.3% over

2000-2006 compared with production CAGR of 14%. Exports to China have grown at a

much faster CAGR of 38% at the cost of exports to other destinations. Sharply risingexports and limited reserves have alarmed steel producers in India. Consequently, steel

producers in India have been pressuring the government to cap total exports at 100m tpa

to conserve iron ore deposits for meeting future requirements, as steel production in India

is poised to reach 200m tpa by 2020.

INDIAN IRON ORE PRODUCTION AND EXPORTS

2001 2002 2003 2004 2005 2006 CAGR (%)

(00-06)

Production 79 80 106 121 140 165 14.0

Exports 41 55 58 68 85 95 19.3

to China 14 25 32 50 69 76 38.0to Others 27 30 26 18 16 19 (2.4)

Source: Industry

Goa and Karnataka have dominated exports

Iron ore production has grown at a faster pace in the states of Karnataka, Jharkhand and

Orissa due to rising demand from China and high iron ore spot prices. The southern Indian

region (Goa and Karnataka) contributes about 37% of total production of iron ore which is

largely in the form of fines. The region produces 60% of total generation of iron ore fines,

all of which is exported. The region accounts for 69% of total exports from India.

Merchant mining of iron ore

has grown at 20% CAGR

in last 5 years

Thereby exports grew at

19% over 5 years to 2006 v/s

14% production CAGR


17/32

1719 February 2008

Sesa Goa

REGIONAL PATTERN IN PRODUCTION (M TONS)

STATE FY01 FY03 FY05 FY06 SH. (%)

Goa 14.6 17.9 22.3 23.7 15

Karnataka 18.9 24.8 37.2 33.7 22

Orissa 14.4 22.1 40.6 49.9 32

Jharkhand 5.0 13.7 16.1 17.4 11

Chattisgarh 20.1 19.8 23.1 24.8 16

Total

Source: Indian Bureau of mines

REGIONAL EXPORT PATTERN

SR. PORTS 2004 2005 YOY 2006 YOY

N O. (M TONS) (M TONS) (%) (M TONS) (%)

Eastern Region

1 Chennai 9.4 9.0 (4.4) 10.5 17.0

2 Ennore 0.3 0.7 141.7 1.2 62.4

3 Krishnapatnam - 0.0 0.5

4 Vizag 9.5 10.6 11.4 6.7 (37.0)

5 Kakinada 0.7 2.7 299.2 3.9 46.7

6 Paradip 8.0 9.7 20.9 10.4 7.8

7 Haldia 4.3 7.5 74.9 8.1 9.3

Western Region

1 Mormugao 22.1 22.1 (0.1) 26.2 18.7

2 Panaji 7.9 9.1 15.6 14.1 55.33 Redi 0.1 0.7 627.1 0.7 (4.9)

4 Karwar 1.1 2.4 120.5 1.8 (25.0)

5 Belikkeri 0.3 1.0 221.0 3.2 214.5

6 Mangalore 6.8 9.4 39.7 6.1 (35.0)

Total 70.4 85.0 20.6 93.6 10.1

Source: Industry


18/32

1819 February 2008

Sesa Goa

Strong coke prices to drive up margins

Increasing global steel production has also been driving up demand for coke. China, a

dominant exporter of coke, has increased the export duty on coke from 15% to 25% in

January 2008. As a result, prices of coke have increased to an all-time high. Sesa Goa

imports coking coal for the manufacture of coke. While its cost of coking coal is fixed

through long-term contracts, it sells coke at spot prices. Strong coke prices would, therefore,

drive up margins.

Coke prices at an all-time high

Sesa imports coking coal via long-term contracts for its manufacture of coke while the

pricing is arrived at annually. For FY08, coking coal prices were fixed at US$96-98/ton

whereas sale of coke is based on spot prices. Coke prices have been volatile due to the

dominance of China in the coke export market. Demand for coke has risen due to increased

steel production and shortage of coking coal worldwide. China has increased export duty

from 15% to 25% in January 2008 to discourage exports. Strong demand and higher

export duty in China have driven the prices of coke to a new all-time high.

COKE PRICES (US$/TON)


Sesa will route Rs10b capex to expand coke & pig iron capacity

Sesa presently has coke-oven capacity of 250,000tpa and similar capacity of pig iron. Pig

iron operations are in Sesa Iron (SI), a subsidiary in which Sesa holds 89%. We note that

the merger of SI with Sesa is already approved. To take advantage of higher coke margins,

Sesa Goa is expanding the capacity of its coke ovens from 300,000tpa to 750,000tpa and

that of pig iron from 250,000tpa to 1m tpa by March 2010. The capex will be funded frominternal accruals due to strong cash flows.

0

150

300

450

600

Apr-00

Jun

-01

Sep

,02

May-03

Oct-03

Mar-04

Aug-04

Jan-05

Jun

-05

Nov-05

Apr-06

Sep-06

Feb

-07

Jul-07

Dec-07

Coke Prices (fob China) Coking Coal Annual contract (f ob Australia)

Strong demand and higher

export duty in China have

driven coke prices to

a new all-time high

Sesa has firm expansion

plans


19/32

1919 February 2008

Sesa Goa

Sesa sells 60% of its coke production to SI for pig iron production while the remainder is

sold to foundries and other pig iron manufacturers in the vicinity. The Rs10b capex will

increase the capacity of coke ovens 3x to 750,000tpa and pig iron capacity by 4x to 1mtpa.

This project will take 18-24 months from zero date. Sesa has already invited offers and

will soon be placing orders for equipment. Therefore, we believe the project should get

completed by March 2010 and earnings will be reflected in FY11.

Coking coal scenario in India

Indian coking coal demand is characterized by rising exposure to imports:Indiahas the world's third largest coal reserves of 253b ton. However, Indian coal has undesirably

high ash content, leading to low calorific value. Coking coal reserves are only 32b ton, of

which only 5.3b ton is prime coking coal. Total production of coal in India has increased at

CAGR of 4.7% during FY00-FY05 to 377m ton while that of raw coking coal has actually

declined at 0.9% to just 32m ton over the same period. However, production of coking

coal for metallurgical application is only 17m ton; this generates washed coal of 5m ton.

Therefore, India is overly dependent on imports to meet consumption of domestic steel

producers. Coking coal imports are likely to increase from 20m ton in FY08 to 40m ton in

the next five years, as production of steel grows.

Coking coal scenario in China

Government initiatives in China have driven coke prices to new highs: Globally

traded coke market is only ~25m ton. China has largest market share of 60%, followed by

Poland and Japan that have market shares of 24% and 6%, respectively. Poland is

landlocked; therefore, its exports are mostly regional. Japan's exports are balanced against

imports of equal quantity. Thus, the seaborne coke market is dominated by China, where

there is a cap on export volumes and export licenses are issued each year. China has been

continuously reducing the number of approved coke exporters each year. In 2008, the

approved coke exporters have been cut by five to 55. China has the largest coke industry

in the world due to local availability of high quality coking coal and increased consumption

by its steel industry.

In China coking coal production grew rapidly, while safe mining practices were compromised

to meet extraordinary growth of pig iron production. This resulted in a high accident rate

and environmental pollution. The Chinese government took the initiative to clamp down on

fresh allocation of mines in 2007 and increased export duty on coke from 5% to 15% in

January 2007 and to 25% in January 2008. Stagnant coke exports from China and rising

production of pig iron in the remaining part of the world during 2005-2008 has driven coke

prices to new heights.

India requires to import

quality coking coal

Stagnant coke exports and

rising pig iron production

have driven coke

prices to new highs


20/32

2019 February 2008

Sesa Goa

Valuations attractive; Buy

We expect Sesa Goa's earnings to grow at a CAGR of 37% over FY07-10, driven by

strong iron ore prices, volume growth of 15-20%, and increasing coke margins. The

incremental volumes from Sesa's mines are now being sold in the spot market at higher

realizations. This is continuously reducing the share of annual contracts, where realizations

are lower. If Australian miners are successful in moving away from the present annual

benchmarking system to an index-based benchmarking system, Sesa will gain significantly

from its annual contracts. There is a possibility of reducing the export duty burden from

Rs300/ton to Rs50/ton, if supply contracts are rephrased to attract the lower iron ore

grade export duty rates of below 62% Fe.

The stock is trading at 7.1x FY09E EPS and an EV of 3.8x FY09E EBITDA. Sesa Goa

has surplus cash of ~Rs16b (Rs406/share, based on March 2008 estimates). We initiate

coverage with a target price of Rs4,677 (EV/EBITDA of 6.5x FY09E). Earnings CAGR

of 37% over FY07-10 would drive a re-rating. Buy.

RELATIVE VALUATION

CM P Y/END BLOOM PER (X) P/BV (X) EV/EBITDA 2008

BERG CODE 2007 2008 2009 2007 2008 2009 2008 2009 PAT (%) ROE (%)

Rio Tinto 111.6 USD Dec RIO AU 19.4 15.1 13.4 6.2 4.6 3.5 8.5 7.6 20.7 28.6

BHP Billiton 32.3 USD Jun BHP AU 13.9 12.0 9.8 6.3 5.3 3.8 7.8 7.0 29.9 45.6

CVRD 25.5 USD Dec VALE5 BZ 10.2 9.4 9.4 3.5 2.7 2.6 7.2 7.3 32.6 33.8

Average 14.5 12.2 10.9 5.3 4.2 3.3 7.8 7.3 0.3 36.0

Sesa Goa 3,336 INR Mar SESA IN 20.3 11.0 7.1 8.2 5.0 3.0 12.7 6.6 35.4 45.2

Source: Company

Risks and concerns

? If there is a sharp drop in sea freight, the freight differential between India-China and

Brazil-China would decline. As a result, spot iron ore fob realizations for Indian iron

ore exporters would fall sharply. Sesa's exposure to spot prices is increasing.

? Sharper increase in coking coal prices v/s coke prices may squeeze margins of the

coke business.

? Changes in India's government policy may adversely impact iron ore exports.

We initiate coverage

with a Buy


21/32

2119 February 2008

Sesa Goa

ASSUMPTIONS

FY05 FY06 FY07 FY08E FY09E FY10E

Iron Ore Segment

Sales (m tons) 9.81 9.56 10.87 11.60 13.34 14.01

Change YoY (%) 14.6 -2.6 13.7 6.7 15.0 5.0

Realization (Rs/ton) 1,024 1,545 1,624 2,400 3,005 3,035

Change YoY (%) 59.6 50.8 5.2 47.7 25.2 1.0

Mining (mt) 5.18 5.53 6.21 6.87 8.25 8.25

Change YoY (%) 11.4 6.9 12.3 10.6 20.0 -

Purchases (mt) 4.63 4.03 4.66 4.73 5.09 5.76

Change YoY (%) 18.5 -13.1 15.7 1.5 7.7 13.1

Purchase Price of Ore 310 398 442 611 916 1,145Change YoY (%) 28.7 11.0 38.2 49.9 25.0

Co ke Segment

Sales (m tons) 0.255 0.242 0.242 0.280 0.290 0.300

Realization (Rs/ton) 14,481 8,671 9,163 11,480 17,220 18,081

Change YoY (%) -40.1 5.7 25.3 50.0 5.0

Coal (Rs/ton) 4,121 5,936 6,328 5,871 6,804 7,144

Change YoY (%) 44.1 6.6 -7.2 15.9 5.0

Source: Motilaloswal Securities


22/32

2219 February 2008

Sesa Goa

Company background

Sesa (Sesa Goa Ltd.) has rich iron ore reserves of 207m tons in the states of Goa, Karnataka

and Orissa. Goas ore is medium grade and is easy to extract without blasting and crushing.

It is then beneficiated to 62% iron and exported. Whereas, the iron ore in Karnataka and

Orissa is of high grade and in rocky form, which needs to be blasted and crushed. Therefore,

mining costs in Goa are lower versus Karnataka and Orissa. Sesa has tied up sales through

long-term contracts, which constitute nearly 76% of sales while 24% sales are on spot

basis. Sesa is the largest private sector iron ore exporter in India and production from its

various mines are as follows:

IRON ORE MINES

STATE PROCESSING PLANT (M TPA) MI NES

Goa 8.8 Condli, Sonshi, Others

Karnataka 2.1 Narrain Mines, Chitradurga, Karadikola mine, Hospet

Orissa 4.1 Thakurani Mine

Source: Company

The company operates in three business segments: (1) iron ore mining capacity of 12mtpa

(million tons per annum); (2) coke ovens with installed capacity of 280,000t p.a.; and (3)

two blast furnaces at its subsidiary, Sesa Industries, with production capacity of 220,000t

p.a.

SEGMENTAL REVENUE (RS M)


Share of iron ore in total revenue increased to 82% on account of higher realization and

volume growth. Share of the coke division will increase in FY09 due to increase in coke

prices.

48 52 5557

74 75 79 78

24 2121 20

10 9 9 1027 27 24 23

15 16 12 12

FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E

Iron ore Coke Pig iron


23/32

2319 February 2008

Sesa Goa


Business segments

Iron ore segment: Sesa commenced operations in 1954 and has mining activities in the

states of Goa, Karnataka and Orissa currently. Activities of the iron ore division incorporates

prospecting, mining, processing and exporting iron ore. It also has a fleet of 15 barges and

small barge repair facilities and a trans-shipper in Goa. It enjoys proximity to the sea and

enjoys strategic advantages in the industry. Iron ore is transported by its dumpers from themines to the ore beneficiation plant. Contracted trucks are utilized for transporting further

to the rivers in Goa. Barges are used for transporting through the rivers to the port where

the ore is loaded on to large-sized bulk carriers.

IRON ORE EXPORTS BY DESTINATION

SEGMENTAL MARGINS

-20%

0%

20%

40%

60%

80%

FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E

Iron ore Coke Pig iron

Source: Company

Japan, China and Europe are the chief destinations for its iron ore exports. However, in

the last two years, Pakistan has become a significant destination for its iron ore. The

company supplies iron ore primarily against long-term contracts and has a strong customerbase. It is less impacted by movement of prices in the spot market.

0%

25%

50%

75%

100%

FY03 FY04 FY05 FY06

China Japan Pakistan Europe Local


24/32

2419 February 2008

Sesa Goa

Mining with the help of shovels and transporting the iron

ore with the help of 40-50 ton dumper to the washeries

Transportation of iron ore with the help of

contracted trucks by road to the rivers in Goa.

Transportation of iron ore with the help of barges

(own and contracted) by rivers to the ports.

Loading of iron ore at ports in Goa to

capesize, panamax and handymax size

Captive

Operations

Outsourced

operations

by road to the

Rail loading point

By Rail to

Chennai / Goa

by road to the

ports in Goa,

Karwar,

Mangalore etc.

Loading of iron ore at ports to capesize,

panamax and handymax size ships.

Captive

Operations

Outsourced

operations

Mining with the help of shovels and transporting the iron

ore with the help of 40-50 ton dumper to the washeries

LOGISTICS IN GOA FOR THE EXPORT OF IRON ORE

LOGISTICS OF EXPORTS OF IRON ORE FROM K ARNATAKA

LOGISTICS IN ORISSA FOR THE EXPORT OF IRON ORE

Source: Company

by road to the

Rail loading point

By Rail to

Paradeep/Haldia

by road to the

ports at

Paradeep and

Haldia

Loading of iron ore at ports to capesize,

panamax and handymax size ships

CaptiveOperations

Outsourced

operations

Mining with the help of shovels and transporting the ironore with the help of 40-50 ton dumper to the washeries


25/32

2519 February 2008

Sesa Goa

The mines in Goa produce 65% of total ore production and derive benefits owing to: (1)

proximity to ports; and (2) ownership of transshipper and barges. However, transportation

costs for its mines in Karnataka and Orissa are manifold. Sesa has invested in four railway

rakes, which have been deployed in Orissa during 2H2006 and has plans to add four more

rakes. Sesa is rationalizing its shipments of iron ore from Karnataka between the eastern

coast and western coast to benefit from the new railway link between Banspani-Daitri in

Karnataka. Logistics constitute 53% of total costs and play a critical role in profitability.

Metallurgical coke segment: This division was started in 1994 as a joint venture coke

manufacturing company in collaboration with Kembla Coal and Coke Ltd. of Australia.Subsequently, this became a 100% subsidiary of Sesa. This subsidiary has been merged

w.e.f. 1 April 2004 and has become a division of Sesa.

The merged unit manufactures and sells quality metallurgical coke used in production of

pig iron, ferro-alloy units and cement mills. Over 60% of coke is supplied to its subsidiary,

Sesa Industries Ltd. for manufacture of pig iron. The installed capacity of coke batteries

is 280,000t p.a. This has been expanded to 300,000t p.a with the help of induction of

stamping facilities. This division has also developed competence in supply of coke oven

technology and has patents. One such order has been executed with JSW Steel in India.

Pig iron division (Sesa Industries Ltd): Pig iron is manufactured in two blast furnaces

with total installed capacity of 25,000tpa. The first furnace was installed in 1992. In 1993,

Sesa Industries (SI) was formed with Sesa Goa holding 51% equity. The second blast

furnace was commissioned in 1994. All the pig iron business was consolidated in SI by

transfer of assets. In 2003, Sesa raised its equity stake in SI to 88.25%. Sesa plans to

merge SI with itself effective 1 April 2005.

SI manufactures basic, foundry and nodular grade pig iron for the steel mills and foundries.

The company has also developed additional special grade of pig iron to cater to the fast

growing niche market of ductile iron castings in India. It produces pig iron in two mini blast

furnaces from iron ore and met coke. Iron ore lumps are sourced from NMDC and other

mines in Karnataka. Around 10-20% of iron ore is sourced from Sesa that produces

mostly iron ore fines and is not suitable for use in the mini blast furnace. Met coke is

sourced from Sesa and the coke oven batteries are located in the adjoining compound and

SI enjoys savings in transportation.


26/32

2619 February 2008

Sesa Goa

0

150

300

450

600

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

Coke Prices (fob China) Coking Coal Annual contract (fob Australia) Pig Iron prices

PIG IRON AND COKE PRICES (US$/TON)

Source: Company

Pig iron prices have improved significantly in last six months due to rising shortage of

metallics globally. The CIS region is a major source of metallics such as pig iron and steel

scrap in global traded volumes. Demand has been really strong in Russia and other East

European countries resulting in a shortage of steel scrap, which has driven prices of pig

iron upward. Rising pig iron prices would improve margins of this segment.


27/32

2719 February 2008

Sesa Goa

INCOME STATEM ENT (RS MILLION)

Y/E M ARCH 2005 2006 2007 2008E 2009E 2010E

Net Sales 15,345 18,443 22,242 33,567 47,943 50,798

Change (%) 72.0 20.2 20.6 50.9 42.8 6.0

Total Expenses 7,889 9,775 12,558 16,166 21,069 24,069

EBITDA 7,456 8,668 9,684 17,402 26,874 26,729

% of Net Sales 48.6 47.0 43.5 51.8 56.1 52.6

Depn. & Amortization 320 296 393 468 432 427

EBIT 7,136 8,373 9,292 16,934 26,442 26,302

Net Interest 75 42 30 20 21 21

Other Income 105 251 409 968 1,426 2,104

PBT after EO 7,166 8,582 9,671 17,882 27,846 28,385

Current Tax 2,462 2,829 3,091 5,746 8,952 9,142

Deffered Tax -61 4 56 204 316 325

Tax 2,401 2,833 3,147 5,950 9,268 9,467

Rate (%) 33.5 33.0 32.5 33.3 33.3 33.4

Reported PAT 4,764 5,748 6,524 11,932 18,578 18,918

Minority Interests 32 36 49 47 73 75

Adjusted PAT 4,732 5,712 6,475 11,885 18,505 18,843

Change (%) 186.1 20.7 13.3 83.6 55.7 1.8

E: MOSt Estimates


28/32

2819 February 2008

Sesa Goa

BALANCE SHEET (RS MILLION)

Y/E M ARCH 2005 2006 2007 2008E 2009E 2010E

Share Capital 394 394 394 394 394 394

Reserves 7,162 11,081 15,697 25,886 42,766 60,047

Net Worth 7,556 11,475 16,091 26,280 43,160 60,441

Minority Interest 114 144 193 240 313 387

Total Loans 233 98 - - - -

Deferred Tax Liability 600 604 649 649 649 649

Capital Employed 8,502 12,321 16,933 27,168 44,121 61,477

Gross Block 5,338 5,807 7,219 8,018 8,818 9,618

Less: Accum. Deprn. 2,133 2,350 2,622 3,077 3,509 3,936

Net Fixed Assets 3,205 3,457 4,597 4,940 5,308 5,681

Capital WIP 212 615 202 202 202 202

Investments 0 0 195 195 195 195

Curr. Assets 7,179 11,243 14,555 25,425 42,778 59,918

Inventory 1,897 3,321 2,985 4,731 6,652 7,043

Account Receivables 1,827 2,474 2,708 4,472 6,200 6,552

Cash and Bank Balance 3,217 5,115 8,471 15,837 29,541 45,938

Others 238 333 391 385 385 385

Curr. Liability & Prov. 2,094 2,994 2,617 3,595 4,363 4,519

Account Payables 802 1,398 1,114 2,076 2,844 3,001

Provisions & Others 1,292 1,596 1,503 1,519 1,519 1,519

Net Current Assets 5,085 8,249 11,938 21,830 38,415 55,398

Appl. of Funds 8,502 12,321 16,933 27,168 44,121 61,477

E: MOSt Estimates


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RATIOS

Y/E M ARCH 2005 2006 2007 2008E 2009E 2010E

Basic (Rs)

EPS 120.2 145.1 164.5 301.9 470.1 478.7

Cash EPS 129.2 153.5 175.7 315.0 482.9 491.5

BV/Share 192.0 291.5 408.8 667.6 1,096.5 1,535.5

DPS 22.5 40.0 40.0 40.0 40.0 40.0

Payout (%) 22.5 31.4 28.2 15.5 10.0 9.8

Valuation (x)

P/E 23.0 20.3 11.0 7.1 7.0

Cash P/E 21.7 19.0 10.6 6.9 6.8

P/BV 11.4 8.2 5.0 3.0 2.2

EV/Sales 6.8 5.5 3.4 2.1 1.7

EV/EBITDA 14.6 12.7 6.6 3.8 3.2

Dividend Yield (%) 1.2 1.2 1.2 1.2 1.2

EV/ton 13,208 11,296 9,951 7,626 6,092

Return Ratios (%)

EBITDA Margins (%) 48.6 47.0 43.5 51.8 56.1 52.6

Net Profit Margins (%) 30.8 31.0 29.1 35.4 38.6 37.1

RoE 62.6 49.8 40.2 45.2 42.9 31.2

RoCE 83.9 68.0 54.9 62.3 59.9 42.8

RoIC 93.5 85.1 77.7 103.3 124.4 115.8

Working Capital Ratios

Fixed Asset Turnover (x) 2.9 3.2 3.1 4.2 5.4 5.3

Asset Turnover (x) 1.8 1.5 1.3 1.2 1.1 0.8

Debtor (Days) 43.5 49.0 44.4 48.6 47.2 47.1

Inventory (Days) 12.4 18.0 13.4 14.1 13.9 13.9

Working Capital Turnover (Days) 12.2 17.0 15.6 17.9 18.5 18.6

Growth (%)

Sales 72.0 20.2 20.6 50.9 42.8 6.0

EBITDA 157.7 16.3 11.7 79.7 54.4 -0.5

PAT 186.1 20.7 13.3 83.6 55.7 1.8

Leverage Ratio (x)

Current Ratio 3.4 3.8 5.6 7.1 9.8 13.3

Interest Cover Ratio 95.5 198.8 313.1 840.4 1,250.2 1,243.6

E: MOSt Estimates


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CASH FL OW STATEM ENT (RS MILLION)

Y/E M ARCH 2005 2006 2007 2008E 2009E 2010E

Pre-tax Profit 7,166 8,582 9,671 17,882 27,846 28,385

Depreciation 320 296 393 468 432 427

(Inc)/Dec in Wkg. Cap. -545 -1,266 -334 -2,525 -2,881 -587

Tax Paid -2,462 -2,829 -3,091 -5,746 -8,952 -9,142

Other Operating Activities -241 -113 -214 -70 -99 -99

CF from Op. Activity 4,237 4,669 6,424 10,007 16,346 18,984

(Inc)/Dec in FA + CWIP -325 -872 -999 -799 -800 -800

(Pur)/Sale of Investments - - -195 - - -

CF from Inv. Activity -325 -872 -1,194 -799 -800 -800

Share Capital Raised/(Repaid) 197 - - - - -

Chg in Minorities 25 30 48 47 73 75

Debt Raised/(Repaid) -685 -134 -98 - - -

Dividend (incl. tax) -1,066 -1,795 -1,825 -1,842 -1,842 -1,842

Other Financing Activities - - - -47 -73 -21

CF from Fin. Activity -1,530 -1,899 -1,874 -1,795 -1,769 -1,767

(Inc)/Dec in Cash 2,382 1,898 3,356 7,367 13,704 16,396

Add: Opening Balance 835 3,217 5,115 8,471 15,837 29,541

Closing Balance 3,217 5,115 8,471 15,837 29,541 45,938

E: MOSt Estimates


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N O T E S


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Sesa Goa

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal

Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solelyfor your information and should not be reproduced or redistributed to any other person in any form.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or

any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding

any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The

recipients of this report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Sesa Goa

1. Analyst ownership of the stock No

2. Group/Directors ownership of the stock No

3. Broking relationship with company covered No

4. Investment Banking relationship with company covered No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required

f ti t ti N th l MOSt i itt d t idi i d d t d t t d ti t it li t d ld b h t id

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