Macquarie Research,:: Coal India- Environmental woes

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Coal India
Environmental woes
Event
 Reducing production guidance: Coal India (CIL) has announced a cut in its
production target for FY11 and FY12 from 460mt and 486mt to 440mt and
447mt, respectively. The company has cited MOEF norms stopping
expansion of coal projects in areas where CEPI (Composite Environment
Pollution Index) is greater than 70. We believe that investors were already
aware of the possible shortfalls and hence have built this into the share price.
We maintain our Neutral recommendation.

Impact
 Lower volume largely built in: We were estimating production of 440mt for
FY11, in line with the revised forecast, but expected 466mt for FY12, which is
higher than current estimates. We are still comfortable with our assumptions
as CIL might be able to sell coal from its stock piles of close to 45mt. In
addition, we see the current guidance as a pressure tactic on the government
to relent on strict environmental norms.
 In any case, the sensitivity is low: For every 10mt shortfall in coal
production, CIL’s profits shrink by only 2%, by our estimates. Hence, even if
CIL achieved only 446mt in FY12, the impact should be limited to 5–6%.
 Coal prices more important: CIL is highly sensitive to coal prices and even
a US$1/t higher realisation increases profits by 10%, by our estimates. We
think that the market will wait for the five-year wage settlement and the price
hike later in the year before re-rating the stock.
 Already gaining from higher e-auction prices: CIL sells around 10–12% of
production on e-auction. The prices of e-auction are currently running 34%
higher than the FY10 average and also 1% higher than our FY12 assumption.
If this persists, our FY12 EPS could see an upgrade of 1%.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs340.00 based on a DCF methodology.
 Catalyst: 3Q earnings and clarity on price hikes.
Action and recommendation
 Maintain Neutral: We do like Coal India for its potential; however, we believe
that concerns about its ability to get the government nod to raise prices given
the inflationary environment would result in opportunities to enter the stock at
lower levels. Maintain Neutral.