Sesa?s Q1FY11 results were in line with our expectations; Ebitda grew 222% YoY and declined 2.9% QoQ to Rs 14.6 billion. Net income grew 208% YoY and 7.3% QoQ to Rs 13 billion. Iron ore sales volumes were a touch below our expectations. Spot iron prices have declined 32% over the past two months on mounting concerns of a slowdown in China. We will review our estimates after the earnings call. Maintain Reduce rating.
In-line quarter; sales tonnage lower than expected: Sesa reported Q1FY11 net profit of Rs 13 bn (+208.3% YoY and +7.3% QoQ), ahead of our expectation of Rs 11.7 bn. We attribute this variance to below-Ebitda line items. Note that the YoY performance is not comparable since the Dempo acquisition has been consolidated only from the September 2009 quarter. Ebitda of Rs 14.6 bn was in line with our expectation of Rs 14.63 bn.
Iron ore realisation of $91/tonne was ahead of our expectation. Sales volumes were 5.4 million tonnes; adjusted-for Dempo volumes of 1.2 mn tonnes, sales volumes declined on a YoY basis. The company attributes relatively weak tonnage performance to forest permit related issues in Karnataka and logistics constraints in Orissa. We would seek clarifications regarding the company?s 20-25% volume growth target against the backdrop of these concerns and a potentially weak offtake of low-grade ore by Chinese traders.
Iron ore prices likely to decline further; mainly led by the incremental slowdown in China: Iron ore spot prices (63% Fe China CFR) have fell 32% from the recent peak. Weaker demand in China is the principal cause, as a rapid softening in steel prices has forced many smaller mills to curtail output. China?s transition to lower growth will likely have an impact across the steel sector and consequently, the iron ore market. We expect iron ore prices to trend lower in the near term as well as over the next few years.
We will review our earnings estimates post-results earnings call, especially on volume growth guidance. On an interesting note, the discount of 58% Fe content ore has widened considerably, to 28.4% from an average of 18% over the past 12 months. Sesa?s seemingly inexpensive valuations have to be viewed against the backdrop of relatively low mine life and weak quality iron ore content.