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Coal India
Neutral
COAL.BO, COAL IN
Management Meeting Takeaways
• Volumes across FY11-12E likely to be revised down, CEPI-related
production impact still hazy for FY12E: Management indicated production
volumes were likely to be revised down over FY11-12E. We estimate FY11E
volume reduction of ~15MT from the current estimate of 460MT (JPMe at
440MT). There is still not enough clarity on whether CEPI would continue
beyond March-11E. Management indicated that prod/off-take would continue to
be a function of evacuation (rail rakes) and environment issues. We expect over
the next 1-2 months for clarity to possibly emerge on: a) prod target for FY12E
(currently JPMe 460MT, COAL 486MT); and b) CEPI. Prod/off-take volume
growth for COAL is dependent upon regulatory clarity.
• Looking at overseas assets, though unlikely to be large ones; more dynamic
pricing for non-notified coal sales possible; power JVs down the road;
OBR expensing to go away post IFRS adoption: Management indicated that
while they are in talks with multiple parties overseas for possible acquisition of
assets, nothing has been finalized, though talks are at advanced stages on a
couple of assets. We do not foresee large acquisitions abroad. We are enthused
by mgmnt commentary of possibly adopting more dynamic pricing toward non
notified coal sales. Over the next three years as more merchant power capacity
comes on stream, we believe COAL's pricing policy could possibly change.
Power JV (where COAL gives assured coal supply and balance sheet, while
other party brings utility experience) is also potentially on the table over the
next few years. Management expects OBR expensing to stop post IFRS adoption
(only actuals would need to be reported). JPM FY12E OBR stands at Rs15bn
and would increase EPS by 8% post the removal of this non cash expense.
• H2 to be significantly better than H1 on e-auction (ASP, volumes),
increased off-take (higher rake availability), but higher wage bill as well:
Management indicated H2 is likely to be better than H1 as railway rake
availability has significantly improved (10 rakes=1MT month). Additionally, eauction volumes and prices both have been higher. H1 e-auction volume sales at
20MT were 10% higher y/y. Mgmt expects e-auction volumes at 14-15% for
FY11E (JPMe 10%). The higher e-auction volumes are essentially because of
rail evacuation problems (spot e-auction is by road) and hence COAL is looking
at e-auction as a means to lower inventory. However, employee expenses are
likely to surprise on the upside with COAL expecting employee expense to
increase 12% y/y (implying FY11E wage bill at Rs186bn vs. JPM at Rs175bn).
JPM H2FY11E EBITDA is Rs84.5bn vs. Rs59.6bn in H1FY11.
We value the company at 7.5x FY13E EV/EBITDA to arrive at our
March-12 PT of Rs320. Our multiple is based on a 38% premium to
global peers. Given CIL’s earnings visibility over the next three
years, we believe an FY13E multiple is appropriate. In our view,
while CIL is a structural play on India's rising coal deficit and is an
India proxy, we believe most of this has been priced in on the
listing day gains. From here, we believe further re-rating is
contingent upon execution of volume growth and washed coal
plans.
The key downside risks to our earnings estimates and PT are delays
in volume expansion and inability to pass on costs (particularly
wage and mining tax) increases. Upside risks would be sharperthan-expected volume growth and large price increases for notified coal sales
Key Highlights from Management Meeting
H2FY11E to benefit from higher volumes, more beneficial e-auction: Larger rake
availability, greater e-auction volumes (~14% for FY11E) and better e-auction
pricing, should drive earnings higher in H2 compared to H1. However employee
expenses are likely to surprise on the upside on higher DA (Dearness Allowance)
which is inflation index linked. While we have assumed 5% y/y increase in wage bill,
mgmt expects wage increase of nearly 12% in FY11E (wages account for ~46% of
total expenses)
FY11-12 volumes to be revised down, though still not enough clarity on CEPI
continuation beyond March -11: In line with recent commentary by the chairman,
mgmt indicated that FY11-12E coal volumes were likely to be revised down. While
FY11E impact of ~15MT, in our view, is well priced in, there is still not enough
clarity on FY12E impact as there is no visibility as of now whether CEPI would be
continued beyond March-11E. We expect more clarity to emerge over the next 1-2
months.
Environment issues impacting production, evacuation issues impacting off take:
Management highlighted that the production for FY11 would be impacted in MCL
and NCL mines due to the CEPI guidelines issued by the Environment Ministry,
Despite high stock levels at its mines (~60MT), logistical bottleneck (mainly rake
unavailability) has led to lower offtakes. Rail rake availability is expected to improve
significantly in the second half (from 156 rakes in Sep-10 to 180 rakes by Mar-11),
which should help improve offtake for the company. Longer term adequate rake
availability would be a key driver of off-take growth.
Cash usage - acquisition, Power JV down the road potentially: Management
indicated that while it is in talks with several parties for acquisition of coal assets
overseas, they ruled out any large-scale acquisitions. The company has earmarked
~Rs60bn for overseas acquisitions. The large cash balance would also be utilized by
exploring potential JVs for power plant, with CIL supplying the coal and the other
party building the power plant for CIL’s captive use. However, we do not see any
large investment by the company in the above opportunities in the very near term.
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