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Post a stellar IPO, Coal India’s (CIL) volumes have been plagued by
production woes and logistical constraints. While FY12 will be another weak
year for volumes, a price hike should drive strong profit growth. Volumes
should improve by FY13 given a softening stand by MoEF and efforts to ease
logistical constraints. Coal India deserves a premium to global peers given
very low probability of YoY earnings decline. We estimate 13% EPS CAGR
over FY10-13 and initiate coverage with an O-PF and a target price of Rs330.
Volumes will improve, but with a lag
The hard stance taken by MoEF on the critically polluted areas criteria has
substantially delayed multiple projects of CIL. There are indications that MoEF will
soften its stand and start approving CIL’s projects but this will boost production
growth with a lag only in FY13. Production growth is likely to stay muted in FY12.
We believe that logistics is the bigger worry as insufficient supply of rakes and
wagons by Indian Railways is likely to increase CIL’s coal stocks to 65mt by FY11-
end. We note that CIL can deliver 10%+ growth in despatches in FY12 by running
down its stocks even if production growth falls to zero, but is unlikely to happen.
Large price hike around the corner, more sales of e-auction coal
CIL intends to take a price hike (we model in 10%) in early-FY12 just before the
wage revision in Jul-11. It also plans to increase proportion of e-auction coal sales
to ~12% of total and also price higher-grade coking coal closer to international
prices. Washed coal proportion will eventually rise but only post FY14. CIL’s price
hikes have thus far lagged inflation but management is targeting faster and
higher price increases going forward if the production and logistics problems
continue. We are sceptical of this happening given implications on inflation.
Premium to global peers likely to continue; initiate with O-PF
We view CIL as a stock that will offer 5-10% EPS growth in a non-price hike year
and 25-30% EPS growth in a price hike year driving a 15-20% EPS growth
trajectory. We believe that the Indian government will eventually give a high
priority to addressing all the issues that hurt CIL’s volumes since the alternative –
import of large quantities of coal – is both very expensive and in many cases not
feasible. Coal India has traded at an average P/E premium of 26% to global peers
since listing. We believe that CIL’s lower probability of an earnings decline, large
reserves and a monopolistic position in a fast growing and supply deficit
environment will ensure that it trades at a premium to global peers. We initiate
coverage with an Outperform recommendation. Our target price is Rs330 at 15.5x
FY13 P/E – 15% premium to global peers. Faster easing of volume constraints
could make us turn more positive on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Post a stellar IPO, Coal India’s (CIL) volumes have been plagued by
production woes and logistical constraints. While FY12 will be another weak
year for volumes, a price hike should drive strong profit growth. Volumes
should improve by FY13 given a softening stand by MoEF and efforts to ease
logistical constraints. Coal India deserves a premium to global peers given
very low probability of YoY earnings decline. We estimate 13% EPS CAGR
over FY10-13 and initiate coverage with an O-PF and a target price of Rs330.
Volumes will improve, but with a lag
The hard stance taken by MoEF on the critically polluted areas criteria has
substantially delayed multiple projects of CIL. There are indications that MoEF will
soften its stand and start approving CIL’s projects but this will boost production
growth with a lag only in FY13. Production growth is likely to stay muted in FY12.
We believe that logistics is the bigger worry as insufficient supply of rakes and
wagons by Indian Railways is likely to increase CIL’s coal stocks to 65mt by FY11-
end. We note that CIL can deliver 10%+ growth in despatches in FY12 by running
down its stocks even if production growth falls to zero, but is unlikely to happen.
Large price hike around the corner, more sales of e-auction coal
CIL intends to take a price hike (we model in 10%) in early-FY12 just before the
wage revision in Jul-11. It also plans to increase proportion of e-auction coal sales
to ~12% of total and also price higher-grade coking coal closer to international
prices. Washed coal proportion will eventually rise but only post FY14. CIL’s price
hikes have thus far lagged inflation but management is targeting faster and
higher price increases going forward if the production and logistics problems
continue. We are sceptical of this happening given implications on inflation.
Premium to global peers likely to continue; initiate with O-PF
and 25-30% EPS growth in a price hike year driving a 15-20% EPS growth
trajectory. We believe that the Indian government will eventually give a high
priority to addressing all the issues that hurt CIL’s volumes since the alternative –
import of large quantities of coal – is both very expensive and in many cases not
feasible. Coal India has traded at an average P/E premium of 26% to global peers
since listing. We believe that CIL’s lower probability of an earnings decline, large
reserves and a monopolistic position in a fast growing and supply deficit
environment will ensure that it trades at a premium to global peers. We initiate
coverage with an Outperform recommendation. Our target price is Rs330 at 15.5x
FY13 P/E – 15% premium to global peers. Faster easing of volume constraints
could make us turn more positive on the stock.
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