Sesa Goa jumps amid volatility

Our Bureau

Kolkata, Aug. 1

Punters seem to be warming up for a rally in Sesa Goa. In the last one week, the stock has gone up by over 12 per cent.

According to analysts, the prospect of substantially higher rates from one-year contracts and increased tilt towards the spot market, which is fetching even higher realisations, have not gone unnoticed in certain market circles.

Enhanced Attention

However, market sources said limited delivery volumes were behind the recent appreciation.

The forthcoming bonus issue (1:1) is also a trigger for enhanced attention. It has fixed August 18 as the record date for bonus issue and sub-division of shares (from Rs 10 to Re one).

The first quarter results also suggested that the company has been able to take advantage of 100 per cent spot price mark up through higher contract-to-spot and China-to-other market ratios.

In a recent report, Indiabulls said it expected the trend of higher realisation and sales to continue during this fiscal year on account of a tight iron ore supply-demand scenario.

While contract prices for iron ore have increased on an average by 85 per cent year-on-year (as per the settlement between Rio Tinto and Baosteel), spot market prices have jumped by around 100 per cent during the period.

Indiainfoline estimated that sales-to-China increased by 70 per cent in the quarter to June 30.

Average realisation

To take advantage of higher spot rates, the company aims to sell all of its incremental production in the spot market. Indiabulls said that it hoped Sesa Goa's average realisation for FY09 to increase to $80-85 a tonne and a spot-to-contract sales ratio of 60:40.

The ratio of long-term contract sales to spot sales for the first quarter was 35:65 from last year's 74:26.

The company was able to receive an average of $90 a tonne for its spot sales from $52 a tonne in the corresponding period last year.

For its long-term contracts, the company had sold iron ore with a 6 per cent rise on an interim basis.

However, EBITDA margins are expected to remain under pressure due to the hike in the export duty to 15 per cent, increasing freight charges, and the renewal of coal contracts in H2 '09 at higher rates