Sesa Goa at Rs 315……Careful you don’t step on some ‘Mines’!

Ashish has raised a very serious query whether Monies are safe Investing in Sesa Goa for a year,given the controversies surrounding the Vedanta Group….Sesa Goa has reacted from a recent high of Rs 362 to Rs 315 and there is a real fear it may soon move below Rs 300 in the short term….significantly so

So what are these adverse developments? Remember these were out,except for the last one below, in end Feb 2009 and the markets and Sesa Goa had sunk to lows…Sesa Goa was available at just Rs 60…Inside eight months it touched Rs 362 and is now Rs 315

• Vedanta Aluminium Ltd has been accused of falsely encashing a Bank Guarantee of Rs 64 crs provided in 2007 by Maytas Infra when signing the MOU to develop a Rs 232 crs township in Jharsuguda in Orissa…a Police Investigation is on
• In February 2009,a division bench of the Mumbai High Court in Goa set aside a December 2008 single bench sanction for amalgamation of subsidiary, Sesa Industries with Sesa Goa on the grounds that the Scheme was in violation of the mandatory provisions of  Sec 394 of the Companies Act.The appellant,a shareholder of Sesa Industries, told the court that Sesa Industries had suppressed information to shareholders that an investigation was going on against the company and it even had an adverse report against it ,when applying to the court for sanction of the Amalgamation Scheme in 2005/6.Sesa Industries has filed a Special Leave Petition in the Supreme Court against this order
• S K Tamotia,ex chief of Nalco was sentenced to three years in prison for corruption and holding disproportionate assets.It was a CBI case that related to his tenure at Nalco.After exiting Nalco he held top positions at Hindalco and the Vedanta Group
• THIS IS THE MOST SERIOUS ONE AND REMAINS UNCONFIRMED…A recent message posted on a popular stock site claimed Zee Business featured recently the possibility of malpractices in Sesa Goa right from 2003…underinvoicing to Mitsui…overstating revenues and profits…it also claimed ROC has send a report to the Government of it’s findings….I went to the Zee Business section of the Zee News website ,but was unable to locate any such coverage….I again reviewed the Annual Reports of 2008/9 of both Sesa Goa and Sesa Industries…. and confirmed that the auditors Deloitte Haskins & Sells have given clean reports….Sesa Goa even has a whistle blower policy in place…ROC comes under the Ministry of Company Affairs and can be directed to conduct an investigation by the Serious Frauds offices or the MRTP sections of the MCA….There is no mention of any such investigation in the Annual Reports….I’m sure the auditors would have qualified their reports if there was any such adverse report and it impacted their opinion of ‘true and fair’ for the financial statements…As per Clause 49 of the Listing Agreements,the CEO/CFO Certifications too are in place in the Annual Reports…..also recently the group has announced it is raising Rs 6000 crs beginning with a US $ 500 Million FCCB Issue…this is being managed by Goldman Sachs and Morgan Stanley…would you not assume they would have done their due diligence before accepting the assignment ? 

However Sesa Goa realises the business and operational challenges it faces.It has been quite candid in it’s Annual Report on these…of

• trying to secure more mining assets to secure it’s growth…it had 240 million tonnes reserves at March 31,2009
• positioning itself in the spot market and leveraging with specific Chinese Importers as the three bigges,Vale,Rio Tinto and BHP Billiton,who control 70% of the sea borne iron ore export,concentrate more on securing long term contracts
• continuing to operate in a market of depressed demand and prices in the short to medium term

Interesting to note it had Rs 1000 crs in intercorporate deposit with group company Vedanta Aluminium…the same company accused by Maytas Infra of falsely encashing a ICICI Bank Guarantee of Rs 64 crs…and interesting to also note that subsidiary,Sesa Industries earned Rs 58 crs in 2008/9 and had a networth of Rs 284 crs(net of deferred tax) and Investments jumped from Rs 92 crs to Rs 147 crs,of which Rs 104 crs have been moved to just the Growth Option of the ICICI Prudential Flexible Income Plan Premium  

Having said all this,I must advise you for the short term to fall back on the old but trusted adage of ‘When in Doubt,Stay Out’…so avoid Trading or Investing in Sesa Goa…Ashish,a year would qualify as  short term.….await further developments and I hope the Company comes forward soon and loud in clarifying on these adverse reports

Those who are considering an Investment in Sesa Goa for the Long Term…hold the ‘Buy’ decision until doubts are cleared and the share price declines to less riskier levels and the road ahead is cleared of any possible ‘Mines’ for this Mining Major

Those who already hold Sesa Goa for some time now are already in a ‘ good gains situation’….take some (long term holdings) or all (Short Term positions) of the profit…those who are conservative to moderate in their risk profiles and hold a Long Term Position,it would be prudent to book all gains….treat it as a rebalancing exercise 

The toughest call is those who hold Sesa Goa and have purchased it at recent highs…if you’re holding it for the short term,prudent to exit,even at a loss….if you’re holding for the long term,check your risk profile and if you have the conviction in the Sesa Goa story and are not going to sweat on price declines in the short term,you should continue holding and if the share price declines significantly, maybe consider averaging if your conviction remains unshaken  

To summarize,hold back your ‘Buy’ decision…..all Short term Positions should exit Sesa Goa….Exit Long Term Positions partially  or completely if you’re going to sweat even at the possibility of significant price declines in Sesa Goa in the short term

As I had blogged a few days ago…I view Sesa Goa for the Long Term and therefore significant declines could be viewed as buying or averaging opportunities…I don’t see Sesa Goa stepping on any ‘ Chinese Mines’ on the road it is treading…it’s positioning itself for it