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The company’s market leadership in iron ore mining and exports, Chinese demand for Indian ore and the attractive valuation for the stock make it a reasonable long-term investment.
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Investors with a three-year horizon can consider accumulating the stock of Sesa Goa, trading at Rs 82.10. The company’s market leadership in iron ore mining and exports, signs that Chinese demand for Indian ore may resume on the back of the stimulus package and the attractive valuation for the stock make it a reasonable long-term investment in the commodities pack.
The stock of Sesa Goa trades at a price-earning multiple of 4.6 times its trailing earnings. In the domestic context, National Mineral Development Corporation (NMDC) and Minerals and Metals Trading Corporation of India (MMTC) (not strictly comparable due to a wider product basket) trade at a P/E of about 15 times.
Global iron ore miners such as BHP Billiton, Rio Tinto and Vale currently trade at 9.7, 9.4 and 6.6 P/Es respectively.
Business Overview
The company’s revenues originate from three segments — iron ore, pig iron and metallurgical coke (Met coke).
The iron ore segment is the backbone for the business and its share in revenues has steady increased in the last four years, to contribute 84 per cent to sales in 2007-08.
Sesa Goa, with its mines in Goa, Karnataka and Orissa, produces lower and medium grade ore. Sixty-six per cent of the company’s iron ore production is exported to China and 20 per cent to other Asian countries such as Japan, Pakistan and South Korea and 7 per cent to Europe. Domestic sales are a miniscule 7 per cent.
Demand Outlook
By relying substantially on the export market, particularly on China, Sesa Goa’s earnings prospects hinge to a large extent on Chinese offtake of Indian iron ore. This being the case, post-Olympic stockpiles and the sharper-than-expected deceleration in the Chinese economy led to imports recording sharp year-on-year falls from October 2008.
Iron ore spot prices also corrected from $190 in May to $ 63 in October 2008. While China’s 4 trillion Yuan ($586 billion) bail-out package is expected to revive demand for steel and, thus, iron ore, the jury is still out on whether overall Chinese import volumes will be maintained at last year’s levels of about 400 million tonnes.
But the past two months have brought signs of a drawdown in Chinese stockpiles and better export offtake of iron ore, especially for Indian exporters. Export volumes of iron ore from India staged a sharp year-on-year increase of 38 per cent and 21 per cent respectively in December and January.
Expectations of higher Chinese demand have propped up spot prices for iron ore by about 30 per cent from $63 to $ 85 a tonne in recent months.
While Sesa Goa appears well-placed to benefit from the higher volumes and higher spot sales, ongoing negotiations on contract prices for 2009-10 between the large iron ore producers and Chinese steel mills, expected to be concluded by April, may be the deciding factor on the price outlook. Current expectations are for a 10-30 per cent cut in contract prices compared to last year.
Financial Overview
Offtake has not been a key problem for Sesa Goa in recent years, with the company managing a 25-30 per cent volume growth every year since 2004-05.
In the current fiscal, Sesa Goa witnessed a volume decline in the September quarter to the tune of 30 per cent on a complete cutback in Chinese demand, but volumes recovered, increasing by 37 per cent in the December quarter. Sales for the last quarter were up by 23 per cent on a Y-o-Y basis, despite the economic slowdown.
Volume growth from the iron ore segment was at 36 per cent year on year and 37 per cent . Sales are up by 76 per cent and net profits by 69 per cent in the nine months ended December 2008.
Steadily rising iron ore realisations have helped Sesa Goa steadily improve its operating profit margins over the years to nearly 48 per cent in the first nine months of 2008-09; though margins have moderated in the December quarter.
A low cost structure and zero financing costs, endows the company with a cost advantage amongst its competitors globally. Vedanta Resources Plc (the 51 per cent holding company) had earlier announced plans for an eight-fold increase in the iron ore production capacity at Sesa Goa.
While this expansion project will certainly add scale over the long term, whether it will be implemented in its entirety, given a softer demand scenario, needs to be seen. This plan has the potential to increase the debt on the balance-sheet. Strong operational performance in recent years has left Sesa Goa with high return ratios (return on capital employed of over a 100 per cent), a strong balance-sheet, with high free reserves and near zero debt. With commodity prices set to fall further, the company has hinted at more room for downsizing costs.
Recent export duty concessions extended by the Indian Government will also translate into better realisations in the coming quarters. The easing off of inflation may see lower policy intervention on ore exports; this has been a key source of risk to earnings last year.
Valuations
The key risks to Sesa Goa’s earnings arise from a sharper-than-expected cut in iron ore prices (contract as well as spot), slippage in Chinese demand and a spike in freight rates.
Volumes and defending its market share being the foremost priority, Sesa Goa may have to work with thinner margins than in the immediate past, for the near term.
A key trigger to the stock price would be the conclusion of iron ore negotiations with China, at the expected prices.
the best blog to describe indian market and equity
10.3.09
Technical analysis for novices
Trading in the stock market is no less risky then trying to make a living off a roulette wheel; there are significant fluctuations in the price movements. However, unlike the roulette, the randomness here is fuelled by the perception of the participants. One of the tools to identify such perceptions is technical analysis, which is a study of two aspects — the price and the traded volume of a stock. These observations are plotted on a graph across a specific timeline for better analysis. The idea is to understand the mood of the market conveyed through the movements on the chart.
Supports and resistances
Every stock price is the result of an ongoing tussle between buyers and sellers. Not all traders agree upon the prevailing prices, hence the constant movement. But there comes a level when a seller is unwilling to sell and the buyer feels the prices can’t go down further. This is labelled as the ‘support’ level.
At this level, buyers will come in to buy the stock and even sellers with a bearish view may not see the price falling further. A similar agreement on overheated prices between buyers and sellers creates a hurdle or ‘resistance’ for the stock price from going up. These levels are vivid and recurrent. The stock price falls to a particular point and bounces back taking support. At ‘resistance’ points, stocks hit a barrier, restricting further rise.
Break-out
Now, if the stock price penetrates a ‘support’ or a ‘resistance’, that means that the general consensus on what the price should be has changed. This is known as a ‘breakout’. It can be the result of a fundamental change in the stock, and is usually abrupt in nature.
Again, one must see it in conjunction with decent increment in volume, signifying a mass change on the consensus about the new prices levels. Once a resistance is crossed convincingly, it becomes a significant support and once a support is penetrated strongly, it turns in to a resistance.
Trend
Every stock trades with a consistent direction in prices called a ‘trend’. A rising trend is characterised by higher lows and highs. In other words, a consistently rising support level. The opposite holds good for a falling trend. Joining the lows in a rising trend and highs in a falling trend, helps one draw a trend line. A breakout, penetrating the trend line, accompanied with higher volumes, indicates a reversal of the trend. Much like breakout of a resistance and supports, the trend line penetration signals fresh entry or exit points.
Moving averages
There are many indicators used in this science. A look at one of the most popular ones — the moving average (MA). MA is nothing but moving average of successive sets of daily prices, plotted in the price chart. Eg. A 50 day-MA is the average of the past 50 days prices (Pt, Pt-1, …..Pt-49). A stock is bought when this MA is penetrated from below or sold once the price moves below the MA. From a longer term perspective, a 200-day MA is a well-respected indicator.
Technical analysis has several such indicators or tools which can be used to interpret stock price patterns and trade them profitably.
But the most important tool is discipline in trading within the visibility provided by the technical tool. Set your biases aside and restrict the losses and take profits wherever the tools indicate!
Supports and resistances
Every stock price is the result of an ongoing tussle between buyers and sellers. Not all traders agree upon the prevailing prices, hence the constant movement. But there comes a level when a seller is unwilling to sell and the buyer feels the prices can’t go down further. This is labelled as the ‘support’ level.
At this level, buyers will come in to buy the stock and even sellers with a bearish view may not see the price falling further. A similar agreement on overheated prices between buyers and sellers creates a hurdle or ‘resistance’ for the stock price from going up. These levels are vivid and recurrent. The stock price falls to a particular point and bounces back taking support. At ‘resistance’ points, stocks hit a barrier, restricting further rise.
Break-out
Now, if the stock price penetrates a ‘support’ or a ‘resistance’, that means that the general consensus on what the price should be has changed. This is known as a ‘breakout’. It can be the result of a fundamental change in the stock, and is usually abrupt in nature.
Again, one must see it in conjunction with decent increment in volume, signifying a mass change on the consensus about the new prices levels. Once a resistance is crossed convincingly, it becomes a significant support and once a support is penetrated strongly, it turns in to a resistance.
Trend
Every stock trades with a consistent direction in prices called a ‘trend’. A rising trend is characterised by higher lows and highs. In other words, a consistently rising support level. The opposite holds good for a falling trend. Joining the lows in a rising trend and highs in a falling trend, helps one draw a trend line. A breakout, penetrating the trend line, accompanied with higher volumes, indicates a reversal of the trend. Much like breakout of a resistance and supports, the trend line penetration signals fresh entry or exit points.
Moving averages
There are many indicators used in this science. A look at one of the most popular ones — the moving average (MA). MA is nothing but moving average of successive sets of daily prices, plotted in the price chart. Eg. A 50 day-MA is the average of the past 50 days prices (Pt, Pt-1, …..Pt-49). A stock is bought when this MA is penetrated from below or sold once the price moves below the MA. From a longer term perspective, a 200-day MA is a well-respected indicator.
Technical analysis has several such indicators or tools which can be used to interpret stock price patterns and trade them profitably.
But the most important tool is discipline in trading within the visibility provided by the technical tool. Set your biases aside and restrict the losses and take profits wherever the tools indicate!
FIIs buying props up HDFC
Mumbai, March 9 The recent interest from foreign institutional investors in the stock of Housing Development Finance Corporation (HDFC) seems to have boosted the housing finance company’s stock price.
The stock of HDFC was up by 2.65 per cent, while the benchmark Sensex was down almost two per cent on Monday. The stock closed at Rs 1,255.80.
The stock price of HDFC witnessed a high of Rs 1,268 on Monday after it opened at Rs 1,210, and touched a low of Rs 1,201.
The stock had recorded its 52-week low last week at Rs 1,116.1.
The main factor influencing price of any stock is the FII trading activity related to it, said Mr Vaibhav Agrawal, analyst with Angel Broking Ltd.
In the case of HDFC too the fact that FIIs have bought the stock is a sentiment booster, he added.
Foreign fund Europacific Growth Fund, through open market operations, has hiked its stake in HDFC to 5.42 per cent.
Europacific Growth Fund had purchased 18 lakh shares, representing 0.63 per cent stake, in the company, according to the disclosure by HDFC on the BSE.
The fund already held 4.79 per cent stake in the company.
After the latest transaction, the FII holds over 1.54 crore shares, representing 5.42 per cent stake, in HDFC.
In another transaction reported last week, foreign fund house Growth Fund of America Inc picked up 1.7 per cent stake in HDFC for Rs 560 crore through open market operations.
The company has been one of the favourite counters for FIIs. Citigroup, CMP Asia, DB International, Merrill Lynch, Aberdeen Asset Management, Copthal Mauritius Investment, JP Morgan and Government of Singpaore were holding stake in the company. Among domestic institutions, LIC and ICICI Prudential Life Insurance Co held sizeable number of shares in the company.
Last month, HDFC re-appointed Mr Deepak S. Parekh as the Managing Director of the company.
Among the big players, HDFC is yet to announce any cut in home loan rates.
As on December 31, HDFC’s capital adequacy ratio stood at 16 per cent and gross NPAs were at 1.01 per cent of the loan portfolio.
The loan book grew by 24 per cent, out of which total sanctions grew by 15 per cent and disbursements grew by 22 per cent.
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