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Coal India Limited
Reuters: COAL.BO Bloomberg: COAL IN Exchange: BSE Ticker: COAL
Cashing in on Indian coal demand; initiating with Hold
A very intriguing coal company; Hold rating, 12M target price INR315
Coal India (CIL), with possibly the world’s largest extractable reserves/production,
finds itself in a sweet spot in which customers fund its working capital and
government levies. Thanks to India's seemingly insatiable coal fired energy needs,
its low cost of operations and negative operating assets, CIL has significant cash
accretion, implying higher returns on net operating assets than peers. Yet with
c30% return post-listing and possible consensus downgrades on prospective
volume disappointment, we see the shares as fairly valued. Hold.
Selling price and OPM do not reflect Coal India’s true monopolistic power
Despite its 82% market share in India, most of Coal India’s sales are at prices that
represent a c60% discount to imported coal. While this seems to suggest that
Coal India lacks true pricing power, this is far from the truth, as 1) Coal India’s
capital cost for new mine development is amongst the lowest in the world, and
selling arrangements make customers liable for it (while Indian Railways shares
the burden for the transportation infrastructure), 2) changes in indirect taxes and
royalties are borne by customers, and 3) customers largely pay advances for
purchases.
Our EPS ests., 12% below consensus, factor in likely volume disappointment
Our earnings model factors in 2-3% volume growth vs. guidance of 5-7% as we
see increased risks of lower production at existing mines and delays in new mine
development in recent updates by the Ministry of Environment. Also, we have
assumed the next notified coal price increase will take place in March 2012.
A defensive stock; we initiate with Hold (target price INR315, -1% return)
We have used an average of values derived from a life-of-mine DCF (12.3% COE)
and P/E of 18x FY12E to arrive at a target price of INR315. Upside/downside risks:
2% higher-/lower-than-estimated volume growth raises/lowers our EPS estimates
by 5%, while a one-year advancement/delay in the next notified price increase
raises/lowers our estimates by c24%/17%. (Please see pages 5, 8, 15-19 and 29-
31 for details on valuation and risks.)
Investment thesis
Outlook
We initiate coverage of Coal India Limited, possibly the biggest company in Deutsche Bank’s
covered coal companies universe by extractable reserves/production, with a Hold. Coal
India’s extractable reserves (equivalent to reserves under the JORC code; refer to Appendix F
for variations in reserves definitions as per ISP and JORC/CRIRSCO codes) stand at c22.3bn
tons, while total proven reserves are c51.7bn tons (equivalent to measured mineral resources
under the JORC code). It has thus far demonstrated a sustained high return on net operating
assets (RNOA) relative to global and regional peers, as large advances from customers have
kept net operating assets negative since FY08. India currently imports c10-12% of its coal
requirements as new mine development lags growing demand. Coal India, which has a c82%
market share in India and is among the lowest-cost producers, is one of the biggest
beneficiaries of the demand deficit. However, we believe that in the near term it could be a
challenge for Coal India to meet volume guidance as new mine development continues to
lag, with the Ministry of Environment tightening norms for emissions at existing mines. As a
result, we estimate a 9.1% earnings CAGR (FY10-12e) for Coal India, 11.8% below
consensus for FY11 and 11.9% below consensus for FY12.
Valuation
We have used an average of values estimated using a life-of-mine DCF and P/E of 18x FY12E
to arrive at a 12M target price of INR315. In the life-of-mine DCF methodology, we value the
currently stated extractable coal reserves of 22.3bn tons, yielding a value of INR305/share.
This excludes any upside from conversion of the company’s remaining c30.1bn tons of
proved reserves into extractable reserves. We have mapped volume growth of 3% until FY17
and then assume steady volume growth of 4% until extractable reserves are entirely
depleted. We have assumed constant prices post-FY17 and rising costs, implying diminishing
profitability. We have assumed a discount rate of 12.3% (beta of 0.8 and risk-free rate of
8.1%). In the P/E methodology we have assumed an exit P/E value of 18x (a premium to
international coal players but at a par to Indian utility players of a similar size). We believe that
the premium is justified largely on account of understated profits at Coal India and also
because the company works with negative operating assets, resulting in very high returns.
Further, we estimate a FY11-13 earnings CAGR of c18%, implying a PEG of 1, which looks
reasonable.
Risks
Apart from delays in environmental clearance and legislative risk (provisions for the new
mining act could result in an earnings dip, depending on when and how the act is
implemented), we estimate the following impact on earnings based on how the company
delivers on volume and the next round of price revisions:
„ Volume risk – We have estimated volume growth for Coal India in the forecast period at
a 3% CAGR between FY11 and FY13. If volume growth is 2% higher than expected, we
estimate EPS would rise by 5% (and vice versa).
„ Timing for change in regulated prices – We have assumed the next price rise for
regulated coal in March 2012. If the process is accelerated by one year, our estimates
for FY12 would rise by 24%. However, if there is a delay in the change in notified prices
by one year, our earnings for FY13e would fall by 17%, all else equal.
Executive summary
RNOA can’t be calculated given high negative net current assets
Coal India, possibly the biggest coal company within the Deutsche Bank covered coal
companies universe by extractable reserves/production, has sustained a high return on net
operating assets (RNOA) relative to global and regional peers. This bargaining power is visible
on its balance sheet (as observed from the RNOA), with both working capital and capital cost
remaining low, but not on the income statement (as c85% of sales by volumes is sold at the
notified price, c60% below the landed cost of imported coal). Also, the last instance when
the RNOA was positive in FY07, it was at c435%, possibly the highest in the world.
Low cost structure means reasonable margins
Despite 85% of Coal India’s sales being at prices that are notified every 2-2.5 years and are
currently at a 60-70% discount to the landed cost of imports, its profits are still comparable
to peers that sell coal at much higher prices. Figure 2 depicts the operating matrix of Coal
India; this shows that Coal India falls in the third quartile in terms of profitability as measured
by net income/t or (PAT/t). This is largely driven by its low cost of operations.
Domestic demand-supply gap can help sustain high return ratio
Based on our coal demand-supply model, we expect that India’s coal deficit will rise from an
estimated 60mnt in FY11 to approximately 150mnt by FY15. India lacks the basic
infrastructure for large scale coal imports and accordingly we believe that Coal India should
continue to hold a monopolistic power for coal sales in India. Currently India imports c10-
12% of its coal requirements as new mine development lags growing demand; Coal India
alone accounts for c82% of coal mining in India. With Coal India’s existing mines already
operating at near peak levels and expansion plans lagging growing demand, this demandsupply situation is unlikely to see a major change. Accordingly, it is quite possible that Coal
India could maintain high return ratios in the medium term.
But our estimates are 12% below consensus for FY11 and FY12
Our estimates are c.12% below consensus for FY11 and FY12, largely owing to our lower
volume growth expectations of c.2-3% versus the 5-7% management guidance. We see risk
of lower production from both existing mines and delays in the development of new mines
as regulatory clearances face delays, particularly from the Ministry of Environment.
The key issue over the near term, in our opinion, is that CIL is looking to get clearances for as
many as 154 projects. These projects await the green signal at both Centre and State levels.
According to press reports these 154 projects are spread over 26,000 hectares of land and
have production projection of about 210m tons. Of these, 105 are awaiting Stage I clearances
while the rest await Stage II clearances. Stage I approval of diversion of forest land by the
user agency is granted after compliance with certain stipulations such as impact assessment
of the area. Stage II is final clearance.
Out of 105 projects awaiting Stage I forestry clearance, as many as 77 are pending at the
state level while 28 projects are at MoEF (Ministry of Environment and Forest) level.
Likewise, of 49 projects awaiting Stage II clearance, 41 are awaiting clearance at the state
level and the rest are awaiting the MoEF’s nod.
Life-of-mine DCF, P/E are apt valuation methods, in our view
According to management, Coal India (CIL) laid down a minimum internal rate of return (IRR)
of 12% at 85% capacity utilisation as a cut-off for development of any new mine. CIL can ask
for an increase in prices to cover that part of its cost inflation which cannot be compensated
through efficiency gains. Management has indicated that the same condition of ensuring
12% ROI is used to propose any increase in notified prices in case of cost escalation. This, in
effect, is akin to a utility company.
The financials, however, also reflect similarities with a fast-moving consumer goods (FMCG)
company with both working capital and capital cost for expansions low. Only c20% of cash
flows (30-40% of adjusted net income) from operations (CFO) on an annual basis are being
used for capex, leaving a large portion of earnings as free cash flow every year. Given this
stable relationship between the adjusted net income and cash generation, net income is a
true representation of the cash flow generation abilities of the company and hence an
earnings-based multiple (P/E) can be appropriately used as a valuation tool. Also, unlike most
other cyclical commodity companies, given CIL’s utility-like model, we believe DCF is a good
valuation method.
We have not used the EV/EBITDA valuation methodology as varying accounting policies for
(a) overburden removal and (b) difference in income tax payments for mining posed
difficulties in assigning the appropriate multiple.
Our 12-month target price of INR315 implies a -1% return
We value CIL at INR315/share (rounded) as an average of our INR305 life-of-mine DCF-based
value, and INR327 P/E-based value at 18x FY12E. Our life-of-mine DCF uses a cost of equity
of 12.3% derived from risk-free rate of 8.1%, equity risk-premium of 5.3% (both Deutsche
Bank estimates) and beta of 0.8% and values only the extractable reserves (equivalent to
reserves under the JORC code; Refer Appendix F for variation in reserves definitions as per
ISP and JORC / CRIRSCO codes).
Commodity or utility play
or…?
RNOA (ex cash) cannot be calculated; and it’s not an aberration
How would you look at a company whose customers not only pay advances but also pay the
company to buy its products, resulting in net operating assets becoming negative? For Coal
India, which is one of the largest coal companies within the Deutsche Bank covered coal
universe, we find that the only observable RoNA (ex cash) reported by the company over the
last three years was 435% in FY07, close to if not the best in its peer group
After 2007, Coal India seems to be one of the few coal companies whose return on net
operating assets (ex cash) cannot be determined. It has sustained this situation over a long
period (see Figure 6) as net operating assets (ex cash) have remained negative since FY08.
Within Deutsche Bank’s covered large coal companies universe it looks as if Coal India’s
financial performance in terms of RoNA is better than its global peer group’s.
And the performance of CIL is not driven by margins
A look at global comparisons would show that Coal India’s OPM margins are in the lowest
quartile. Obviously this is largely on account of selling coal at c60% discount to international
coal prices.
But watch for high fixed asset turnover and working capital…
A look at the company’s balance sheet would show why this happens. This sharp jump in
RNOA (ex cash) is driven largely by the two things. Firstly, there is consistently a high fixed
asset turnover. Figure 9 shows that for Coal India the capital intensity continues to be low.
When we compare Coal India, which sells at a c.60% discount to the landed cost of imports,
we find that its asset turnover is amongst the best in its peer group, which is quite creditable
as asset intensity would be quite low
In addition, there has been an increase in negative working capital days over the past five
years, from 131 days to 200+ days in FY10. The increase in negative working capital was
largely on the back of increasing advances from customers and fall in receivable days (from
24 days in FY06 to 16 days in FY10). The increase in negative working capital was largely on
the back of increasing advances from customers and fall in receivable days (from 24 days in
FY06 to 16 days in FY10).
A look at its comparable peer group (either Peabody in the US and China Shenhua, for
example) would show that Coal India has a sharp negative working capital, which aids the
company in cash generation.
…resulting in high return on net fixed assets…
Hence, despite low operating margins, Coal India’s return on net fixed assets at ~50% is
quite impressive, possibly among the highest in the world.
…and a very high ROE despite large cash balance at 3x NFA
Coal India’s net cash is 2.74x its net fixed assets (NFA). Being a government company, CIL
has to invest in low-yielding government bonds with yields less than 7% pretax. Despite 70%
of its assets given a mere 6.5% pretax yield, we find that CIL’s average ROE is at a
remarkable 38% in FY10 and is also lower than its return on net fixed assets.
Profits are understated as per global IFRS norms
According to management, Coal India’s profits would have to be raised by 20-30% if the
company were to report earnings as per IFRS, as would its net worth by 30-40%.
Might the company consider higher payouts?
Coal India’s current cash balance at USD9bn raises the question of how it will be used. So far
the company’s payout ratio has been in the 25-35% range. With the current pace of
operations, unless the payout is raised, there is a strong possibility that EV would become
negative by FY17. Also acquisition plans for investments greater than USD1bn would
continue to require greater government scrutiny and it is often difficult to do M&A in a
transparent manner. Given these challenges, the possibility of a higher dividend payout
seems a reasonable option for using the company’s big cash surplus.
Our 12-month target price
Shades of both a utility and FMCG company
According to company, CIL has laid down a minimum internal rate of return (IRR) of 12% at
85% capacity utilisation as a cut-off for development of any new mine. CIL can ask for an
increase in prices to cover that part of its cost inflation which cannot be compensated
through efficiency gains. Management has indicated that the condition of ensuring 12% ROI
is used to propose any increase in notified prices in case of cost escalation.
CIL’s prices have been fairly stable over the last cycle of coal prices, while international coal
prices have fluctuated widely. In fact, over the last 10 years, CIL’s prices have seen a 5.1%
CAGR, lower than the general rate of inflation in India. There has been no downward revision
in CIL’s prices. Key to note is that CIL’s prices are still at a c60% discount to equivalent
international coal prices; hence we believe the probability of any fall in CIL’s realisation from
the sale of regulated coal is virtually zero, even if international coal prices fall sharply.
So, is Coal India a utility company…
We observe similarities between the business models of Coal India and Indian power utility
NTPC which operates on a regulated return model with assured return on equity and a
provision of complete pass-through of cost escalations. Figure 20 compares the business
models of CIL and NTPC.
… or an FMCG company with low working capital and capital
costs?
Coal India’s capex requirement has been very small compared to the annual cash flow
generation of the company. As shown in Figure 21, its capex has been between 20% and
40% of its adjusted net income. Of the total cash flow from operations (CFO), only 20-30% is
used for capex, leaving a large part of earnings as free cash flows every year. Currently, CIL is
trading at a free cash yield of 6.7%. We believe this stable relationship between the adjusted
net income and cash generation shows that Coal India’s net income truly represents its cash
flow generating ability; hence an earnings-based multiple (P/E) could be used as a valuation tool.
Life-of-mine DCF gives a valuation of INR305/sh
The life-of-mine DCF of currently stated extractable coal reserves of 22.5bn tons at COE of
12.3% gives a value of INR305/share. This excludes any upside from conversion of the
remaining of c23bn tons of reserves of the company. In this methodology, we have tried to
estimate the value the extractable reserves. We have mapped volume growth of 3% until
FY2017 and then assumed volume growth of 4% until the extractable reserves become zero
(extractable reserves equivalent to reserves under the JORC code. Refer to Appendix F for
variation in reserves definition as per ISP and JORC / CRIRSCO codes). We have assumed
constant prices post FY17 and rising costs, implying a diminishing profitability. Again, we
assumed the discount rate at 12.3% (beta of 0.8 and risk-free rate of 8.1%).
Our sensitivity analysis shows that the life-of-mine DCF rises to INR316 if 40% of incremental
proved reserves (over and above the existing extractable reserves) are converted to
extractable reserves (equivalent to reserves under the JORC code, refer to Appendix F for
variations in reserves definitions as per ISP and JORC / CRIRSCO codes).
We have assumed 18x FY12E P/E as another valuation method
Our target P/E multiple of 18x FY12E is at a 50% premium to our target multiple for Indian
power utilities and at a 25-30% discount to FMCG companies in the Deutsche Bank universe.
Figure 26 gives a comparison of Coal India to power utility company NTPC as well as FMCG
companies Hindustan Unilever and ITC.
We believe that this premium for Coal India to NTPC and other commodity companies is
largely justified as:
„ First, the profits for coal India are understated by c. 20-29%. Note that CIL charges
annually INR20-30bn as additional overburden removal charges. According to
management, under IFRS accounting standards these charges cannot be provided,
resulting in net profit for the company being understated. Historically we estimate that
the understatement has been some 20-29% over the last few years.
„ Second, Coal India’s FCF is about 15-20% higher than its net income as working capital
is negative. Hence despite a relatively low 14-15% CAGR in earnings, we believe that a
marginal premium of 18x FY12E EPS looks reasonable. We believe that the company’s
earnings stability, strong balance sheet and extraordinarily high operating ROE should
result in the premium being sustained.
Target price is average of values based on life-of-mine DCF, P/E
We value CIL at INR315/share (rounded) as an average of our life of mine DCF-based value of
INR305/share and P/E-based value of INR327/share at 18x FY12E. Our life-of-mine DCF uses
cost of equity of 12.3% derived from a risk-free rate of 8.1%, equity risk premium of 5.3%
(both Deutsche Bank estimates) and beta of 0.8% and values only the extractable reserves
(equivalent to reserves under the JORC code. Refer to Appendix F for variations in reserves
definitions as per ISP and JORC / CRIRSCO codes).
EV/EBITDA as a valuation tool may not be appropriate
We find it difficult to apply an appropriate EV/EBITDA for estimating the value for Coal India
because of a) the varying accounting policies for overburden removal and b) the difference in
income tax payments for mining.
CIL reports royalty and other statutory payments below the gross sales figure and hence the
net sales number represents the actual amount received by the company after all the
government levies. On the other hand, some companies report royalty payments below
EBITDA and hence their EBITDA figures are overstated to that extent.
Also, the tax rate of some companies like PT Bumi (45%) is much higher than that of CIL (30-
33%). Hence a higher EBITDA does not really mean higher profitability at the net income
level.
Global peer comparisons
Looks expensive on a model of growth expectations
A look at Figure 28 and Figure 29 shows that Coal India appears to trades at a premium to
global peers on both a P/E-EPS growth matrix and a P/B vs RoE growth matrix. The important
point to note in this P/E and EPS growth comparison is that many of CIL’s peer companies
are in a turnaround stage where they are just recovering from low coal prices in CY09 and
building expectations of high earnings growth expectations of higher coal prices over the
next two to three years. CIL, on the other hand, has an annuity-type model due to a majority
of its output being sold at contracted prices, giving it a more stable business model. Size is
another differentiating factor, as no other company matches the scale of operations of CIL
(431MT in FY10) and the closet peer is China Shenhua (245MT in CY09). Moreover, as we
mentioned earlier, EPS is understated for Coal India.
One can look at assigning a higher price/book for CIL as operating ROE is much higher than
the reported RoE. CIL has cash balance of ~USD9bn makes cash at 2.74x Net Fixed Assets.
With cash yields in India at less than 7% (pretax levels), overall RoE at ~ 40% understates the
business RoE. Moreover, CIL’s ROE is less volatile than at some of its peers who suffer from
price and asset cyclicality due to the cyclical nature of the commodity business.
Free cash flow yield of 6.7% not as attractive as peers…
Coal India’s free cash flow yield (FY12E) is in the third quartile compared with its peers;
however, peers of comparable size such as China Shenhua have an even lower free cash
flow. This difference is partly due to the fact that, unlike other peers, CIL does not have to
invest in transportation infrastructure like railways, ports, etc and hence its overall capex per
ton for incremental production tends to be lower than its peers’.
Looks inexpensive on EV/ton methodology
Coal India trades at ~USD1.6/ton of its total extractable reserves of 21.75bn tons. Even
accounting for the fact that the average gross calorific value (GCV) of CIL’s coal at ~3,500
kcal/kg is much less than Australian/South African coal (6,000-6,500 kcal/kg), Chinese coal
(5,500-6,200) and Indonesian coal (5,500-6,000 kcal/kg), CIL still has one of the cheapest coal
stocks as it trades at a steep discount to its global peers.
Please note that here we have not ascribed any value to indicated and inferred reserves of
CIL (Refer to Appendix F for variations in reserves definitions as per ISP and JORC /
CRIRSCO codes) which have the potential to get classified as extractable reserves. Hence,
the CIL stock also offers an added option value of upside from the conversion of these
resources into extractable reserves in the future.
Risk analysis
Sector-related risks
Regulations are complex and governed by multiple authorities
Coal mining is a heavily regulated industry in India, and there are multiple approvals, licenses,
and permits required from various authorities, such as the Ministry of Coal (MoC), the
Ministry of Environment and Forests (MoEF), and various state governments, etc. These
approvals span various stages, such as the approval of the mining plan, the grant of the
mining lease, land acquisition, environmental clearances, labour issues, selling arrangements,
and pricing policy, etc. Furthermore, these approvals are subject to renewal from time to
time. So, in case the authorities refuse to renew these licenses and approvals, or if the
Ministry of Coal asks the companies to renounce their mining rights to any mines, this could
affect the reserve base and production of the respective companies.
Land acquisition is an important hurdle for most projects in India
Land acquisition has proven to be an important hurdle for numerous projects across various
industries in India, including mining, steel, power, etc. Coal India is required to acquire the
land overlying its reserves, and this process could be complicated if the land is either forest
land or owned by private parties. Land acquisition in India is covered by the Coal Bearing
Areas (Acquisition and Development) Act of 1957 and the Land Acquisition Act of 1894,
which involves a fairly long process, including a public hearing. The company can face delays
and cost over-runs in its projects if there are any disputes regarding the rehabilitation package
or general opposition by the local population to mining.
Environmental clearance is an overhang on coal mining
The coal mining industry is subject to increasingly strict regulations regarding environmental
protection, air pollution, water pollution, land use, storage and disposal of waste, and health
issues. In the past, the industry had to bear the additional expenditure for the rehabilitation of
mining-affected people, the restoration of land after mining, and safeguards regarding
earthquakes, fire, etc.
MoEF’s recent proposal to ban mining in certain areas classified as forest land could
affect reserves and production estimates
The MoEF has recently introduced some initiatives to identify particular areas where mining
activities will be prohibited in order to preserve the forest cover. The identification of these
restricted areas will be based on field studies of the forest cover and coal reserves. The
MoEF is currently in discussion with the MoC to consider the possibility of diverting certain
land, designated as forest land under this proposal, for mining purposes. If the two ministries
are not able to reach consensus on this issue, then the coal mining industry faces the risk of
losing those reserves that fall under designated forest cover areas.
A large portion of sales is governed by the prices notified in consultation with the
Government of India
A large portion of sales of the industry currently occur through Fuel Supply Agreements
(FSA), and the prices for this supply are not market-driven. These prices are notified by the
respective company in consultation with the Government of India (GoI). If the GoI chooses to
exercise its control over pricing and keep the selling prices low in the interest of the end
users, the industry may be constrained in terms of adjusting the prices to reflect its true
costs and the international prices of coal.
Inadequate transportation infrastructure poses a risk to off-take arrangements
Railways and roads are the primary modes of transportation of coal from mines to end users.
Rail transportation is an important mode for long-distance supply, and it is completely
controlled by Indian Railways. The growth in rail transportation has failed to keep pace with
the growth of user industries, and hence its users (such as the mining and cement industries)
regularly face constraints due the inadequate supply of rail infrastructure, rakes, wagons, etc.
Road transportation is generally operated by third-party operators. A shortage or disruption in
either of these could affect the off-take of coal and hence increase the coal inventory. Rising
inventory not only affects the sales but is also a significantly land-consuming activity, leading
to the sub-optimal use of mines.
Company-related risks
Fire and land subsidence problems in certain legacy mines pose serious risks
The mining area in the Jharia and Raniganj coalfields, operated by subsidiaries of BCCL and
ECL, respectively, are faced with problems of fire and land subsidence due to non-scientific
mining carried out by the mine owners prior to the nationalisation of the coal industry in India,
and pose serious environmental, health, and safety risks. The GoI requires the company to
deal with the problems of fire and land subsidence as well as implement the rehabilitation
programme for the affected people. The costs are to be shared by CIL with respective
agencies, and all coal manufacturers contribute to this fund through a Stowing Excise Duty
(SED). However, the actual costs involved in addressing the problems and rehabilitation could
be higher than the amounts budgeted by the company, and these costs are not covered by
any insurance policy.
Insurance cover may be inadequate for potential future claims
The mining industry is subject to the risk of potential claims with respect to damage due to
personal injury, damage to property and equipment, environmental damage, natural disasters
such as earthquakes, fire, land collapse, toxic gases, etc. However, Coal India maintains only
selective insurance covers. It does not maintain an insurance cover as per industry standards
both in India and globally regarding all the potential risks to its operations such as damage to
the equipment and property, third-party insurance, and liabilities from environmental damage,
mine reclamation, etc. The potential liabilities from any of such uncovered events could hurt
the future profitability of the company.
Reserve estimates and mining costs could change in the future
The current extractable reserve estimates of the company’s 21.7bn tons are based on past
exploration activities and sampling techniques. However, if the geological conditions faced
during future mining are different than those predicted, then the coal reserves could be
revised downwards. Furthermore, the current cost structure of the company is based on the
kind of reserves it is currently using for production. However, as the company depletes its
current reserves, the quality of the coal mine could become inferior to the current quality, or
the new reserves could be in a more geologically challenging environment, which could drive
up the cost of mining coal.
Employee costs are largely governed by government policies
Employee costs have varied between 34% and 51% of Coal India’s nets sales over the last
four years. The salaries and wages of its employees are governed, to a large extent, by
government policy regarding the salaries of all employees of Public Sector Undertakings
(PSU). If, in the future, the GoI raises the salaries of all PSU employees by a substantial
amount, the cost structure and profitability of CIL could be adversely affected
Quantification of some of the risks as per earnings model
Based on our earnings model, we estimate the following impact on earnings:
„ Volume risk – We have estimated a 3% CAGR in volumes between FY11 and FY13. If
volume growth is 2% higher than expectations, we estimate EPS would rise by 5% and
vice versa.
„ Sales mix risk – We have assumed a virtually constant product mix, with increases in
washed coal only by 1% in FY12 and a further 1% in FY13. In case the proportion of
washed coal sales rises by 1% more than our expectations, the net positive impact on
earnings would be 2% on FY12E and FY13e.
„ Timing for change in regulated prices – We have assumed the next price rise for
regulated coal on March 12. If the process were accelerated by one year, our estimates
for FY12 would move up by 24%. However, if there is a delay in the change of notified
prices by one year, our earnings for FY13e would fall by 17%.
„ Impact of working capital days – A five-day improvement in the working capital cycle
could enhance the target price by 3%—though the impact on earnings is marginal.
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