As part of the Union Budget 2011-12, export duty on iron ore is proposed to be hiked to a uniform 20% from existing 5% on fines and 15% on lumps, further compounding problems for Sesa Goa. We estimate FY12E EBITDA impact of Rs8.7bn (16%) and EPS impact of 11%. However, in our opinion, CMP adequately factors in the concerns. Maintain ‘BUY’ with a revised DCF-based TP of Rs326.

Sesa’s problems galore: Export duty hike further compounds problems for Sesa Goa, already reeling under concerns of a decline in volume growth (closure of third-party mining in Orissa, export ban from Karnataka) and uncertainty on open offer for 20% in Cairn India.

Limited ability to pass on the duty hike to squeeze margin: We believe that Indian exporters, with only 10% of global seaborne trade in 2010 (pls ref pg3), have limited ability to influence global iron ore prices and hence would have to absorb the majority of hike in export duty. We expect additional export duty to contract Sesa’s

FY12E OPM by 906bps to 49%.

Pelletisation - The way forward: Hike in export duty on iron ore and removal of 15% duty on pellet is a move to incentivise investments in setting up more pelletisation capacity in India to domestically consume majority of iron ore fines. We believe that over a period of time, this would significantly reduce iron ore exports from India, which could provide strength to international iron ore prices.

OUTLOOK AND RECOMMENDATION

Although Sesa Goa faces multiple headwinds, we believe that underperformance of 43% to Sensex in last one-year factors in the concerns adequately, while +ve impact of strong iron ore prices on cash inflow is being severely discounted. We have assumed FY12 iron ore price at 20% discount to current levels and discount rate of 18% for DCF valuation. We maintain ‘BUY’ on the stock with a revised TP of Rs326 (DCF-based value of Rs197/sh for core business; Rs129/sh for 20% stake in Cairn and net cash). However, our estimates do not factor the impact of Mines and Minerals (Development and Regulation) Act, 2010 with a proposal of 26% tax on mining profit or additional royalty