Volume concerns, pricing gain; Upgrade to `BUY' Sesa Goa's consol. revenue and EBITDA grew 19% YoY each to Rs22.5bn and Rs12.3bn respectively, on increased realisation
(up 59% YoY to USD87/t) despite lower volumes (5.4mnt, dow 21% YoY, first decline in 14 qtrs). Adjusted profit rose 40% YoY to Rs10.6bn on higher treasury income and lower tax rate.

Key result highlights:

?? Iron ore: Sales volume declined 21% YoY to 5.4mnt, first decline in 14 qtrs, on export ban in Karnataka, extended monsoon and logistic constraints in Goa and Orissa. Further, the company terminated the mining contract in Orissa due to unviable terms. Operating cost/t surged by 66% YoY to USD38 on increased royalty, export duty, freight and cost of third party purchase. ?? Revenue from Pig Iron and coke grew 14% YoY and 16% YoY respectively on better realisations despite lower volumes. Cairn: Decision by Oil Ministry on Vedanta's acquisition of 40-51% stake in Cairn India from Cairn Energy expected soon. Sesa's open offer for 20% @355/sh of Cairn India would follow accordingly. (Pls see pg4 for Sesa's TP sensitivity to stake buy in Cairn India) Cash and Eq.: Sesa has Rs92.3bn (incl. Rs10bn of ICD to VAL). Expansion projects: Expansion of 375ktpa of pig iron and 280ktpa met coke at a capex of Rs6.1bn is scheduled for Q1FY12 completion.

VALUATIONS AND RECOMMENDATION

Despite headwinds facing Sesa's volume-led growth, we believe that strong iron ore prices would spur Sesa's FY12 performance. We have revised Sesa's estimates and TP to factor in lower volume and higher iron ore price assumptions (see pg3). We have hiked WACC to 18% (15%) to account for less sustainable price-led growth. We believe that Sesa's CMP adequately factors in concerns about volume growth and Cairn stake buyout, without due cognizance to the impact of increased iron ore prices. We upgrade the stock to `BUY' with a revised TP of Rs383 (DCF-based value of Rs246/sh for core business; Rs137/sh for 20% stake in Cairn and net cash).