The recent surge in demand for iron ore, a key raw material used in steelmaking process, has led to a rally in a few mining stocks during the past one month. Sesa Goa, the largest exporter of iron ore in India, is one such company whose stock price rose more than one-third in the past one month. In comparison, the Sensex has gained only 7.5% during the same period. This phenomenal rise in the stock price of Sesa Goa has not been without changes in fundamentals.
Over the past few months, the demand from China for iron ore has increased significantly. This has resulted in a rise in price of iron ore fines, data from Bloomberg shows. This spike in export prices of iron ore augur well for a company like Sesa Goa, which exported more than 90% of its iron ore past fiscal.
Further, China accounted for more than 84% of its total sales volume past year. The company also sold the bulk of its products through spot market rates for iron ore. What all these mean is that the company’s topline and hence bottomline are closely linked to any price movements in Chinese ports.
And the current spike in prices is definitely good news for the shareholders of the company.
According to industry sources, the demand for Indian iron ore is likely to be sustained in the near term. The iron ore exported by Indian companies such as Sesa Goa is of slightly lower grade, and has lesser iron content. The Chinese steel mills usually mix-up the high-grade iron ore coming from elsewhere with the low-grade iron ore coming from India to reduce their overall raw material cost. As a result, Indian companies are less likely to face any serious threat, at least in the short-term, from other global companies, which usually supply high-grade iron ore.
This rise in demand for iron ore will result in a better second-half for companies like Sesa Goa. Industry officials said the October-December quarter is expected to be one of the best quarters for Sesa Goa in the current fiscal also. Besides, the company is expected to register higher sales realisation during the second half of the current fiscal, compared with the same period past year, when commodity prices crashed in the wake of the global financial crisis.
The company reported earning per share (EPS) of slightly more than Rs 12 during the second half of past fiscal. Assuming the better growth in volume and prices, EPS for the second half likely to be reported below Rs 15, thus taking the full year estimated EPS to around Rs 22. The market seems to have factored in all these facts, and the stock is currently trading at a forward price earning multiple of close to 17, not very high for a commodity stock in good times.
Source : The Economic Times