Export hassles likely to shave off profits from Sesa's casket

Mumbai: Iron ore producer Sesa Goa is in all likelihood set to face the consequences of heavy export duty imposed on it in March 2011. The duty was hiked to 20 percent from 5 percent for fines and from 15 percent for lumps in its budget which might spoil margins for the company. Fines and lumps are byproducts of iron ore.

Over all, Sesa Goa is not expected to spring any surprises during the first quarter results on Thursday. While Sanjay Jain of Motilal Oswal expects operating profits of Rs 12,600 crore, Chirag Shah of IDFC Institutional Securities feels it would be around Rs 12,200 crore. During the quarter, average spot iron ore prices were flat compared to last quarter at $ 181 per tonne, up 9.2 percent on an year on year basis.

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In Q1 FY12, Jain expects Sesa's iron ore sale volume to increase 6 percent YoY to 5.7mt and average realisation to fall 2 percent YoY to Rs 4,138/ton. Over all the company is likely to post a net sales growth of 7 percent YoY to Rs 25,700 crore (down 29 percent QoQ).

[caption id="attachment_45278" align="alignleft" width="380" caption="Will the steel sheen remain for Sesa Goa? Paul Sakuma/AP"][/caption]

The major concern, as Bikash Bhalotia of Pinc Research mentions is going to be sales volume, which for him, could grow around 7-8 per cent for the quarter. The export ban in Karnataka had been lifted but all analysts say, exports have not started as the state government is not ready to give transportation and other approvals. There has been a lot of negative outcry regarding export of iron ore as many believe, with rising demand and production of steel, India needs to save iron ore for future instead of exporting it. In fact, according to a Reuters estimate, iron ore exports might fall to 71.25 million tonnes this fiscal, from 95 million tonnes in the previous year. Sesa Goa is now selling most of its iron ore domestically, prices of which are fixed by NMDC and Orissa Mining Corp., as they are major suppliers of iron ore domestically.

Now that the talks of royalty possibly doubling for non-coal mining companies is doing rounds with the new MMDR Bill, it could hit Sesa Goa even more.

However, pricing is the only relief as iron ore prices are expected to remain firm in the coming quarters. But it is not possible to take a long term view. China, the largest importer of iron ore, has already started its monetary tightening policies. If steel demand falls, iron ore producers will not have the luck that they have right now. Moreover, the clearance of the Vedanta deal will also determine how the company's fate shapes up in the longer term.