Coal India - sluggish volumes; uncertainty on pricing; company update; Edelweiss

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Coal India (COAL IN, INR 305, Hold)

Reiterated volume issues; cuts FY11 volume to 427 mt from 431 mt

Coal India (CIL) management reiterated CEPI and logistics related issues being the cause of cut in volume estimates to 431 mt from 465 mt in FY11 and to 447 mt from 485 mt in FY12. FY11 volume is likely to be further lower at 427-428 mt since Q4FY11 has seen no Y-o-Y growth in rakes availability.

Recent softening of stance by MOEF can benefit volumes only in FY13

Post meetings between the Coal Ministry and MOEF, 16 coal projects may obtain relaxation in environmental norms. However, CIL indicated that the usual environmental/forest clearance process will have to be followed and hence possibilities of beneficially affecting FY12 production are virtually negligible. Assuming an early and favourable resolution, production FY13 onwards could jump 5.0-5.5% Y-o-Y. Further, a Group of Ministers meeting is scheduled to expedite at least the mines under the ‘Go Areas’.

E-auction proportion constrained; uncertainty on raw coal price hike

CIL indicated that increasing e-auction proportion beyond 12% was not possible considering its inability to provide adequate coal under FSAs. However, its price premium over raw coal has increased from 56% in FY10 to 93% in December 2010. The company has also commenced the process to increase raw coal prices, but no guidance on quantum or timing was given. Coal sold to sectors with market-linked pricing (e.g., merchant power, non-power sectors) may eventually move to market prices.

Outlook and valuations: Upsides priced in; maintain ‘HOLD’

We estimate that an 11% increase in raw coal realisations is required to maintain our previous FY12 estimate. We believe this is unlikely and build in a price hike of 7%. Our FY12 EBITDA and PAT estimates are revised down 16% and 15%, respectively, while our DCF valuation dips from INR 316/share to INR 291/share (a 4.7% downside to CMP). Beyond FY12, we build volume growth of only 3% against 5% earlier. While we retain our absolute ‘HOLD’ recommendation, we downgrade the relative rating from ‘Sector Performer’ to ‘Sector Underperformer’. We also introduce FY13 estimates.