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Coal India------------------------------------------------------------------------Maintain OUTPERFORM
Volume guidance disappointing; profitability drivers though are intact
● On 16 February, CIL held a conference call on results declared on
14 February.
● Despite some visibility on lifting of the CEPI-triggered ban, volume
guidance was revised down sharply: 445 mn t to 428 mn t in FY11
and 487 mn t to 447 mn t in FY12. Even after the CEPI block is
lifted, clearance could take a while. In addition, the evacuation
infrastructure is a serious constraint, and so are law and order
issues around some mines.
● At the same time, e-auction prices are up sharply. Despite a pick
up in costs, well flagged to the government in consultation for
price increases (expected July 2011), profitability has so far not
been impacted. If price increases are taken on time, our EBITDA/t
estimates can have an upside.
● We cut our volume growth estimates, but increase our price
assumption marginally to build in higher e-auction prices and
slightly higher e-auction volumes. This improves our EBITDA/t,
and largely offsets the decline in volumes. We cut our FY11-13
EPS by 3% each. Our DCF-derived target price, rolled forward,
remains Rs350. We maintain OUTPERFORM
Volume troubles continue despite lifting of CEPI overhang
Over the past two weeks, there have been several interactions
between the Minister for Environment and Forests (MoEF) and the
Coal Minister. As reported widely in the news, in a vindication of Coal
India’s stand of escalating the approval delays, it is likely that in the
end-March review, the CEPI-triggered block on accepting CIL’s
expansion plans will be lifted. Similarly, many of the “no go” areas are
being re-evaluated by the MoEF.
Management explained though that this would not immediately lead to
a pick up in volumes. The CEPI-related block was on MoEF accepting
CIL’s expansion plans for review – with the block lifted, the plans will
be resubmitted for the ministry’s approval. In the interim, CIL will work
on improving its infrastructure. The full impact of these volumes will
thus only come in FY13.
At the same time, CIL has been facing several other constraints – that
of getting sufficient rakes from the railways, as well as law and order
issues in its subsidiaries MCL (Talcher coal-field) and SECL (North
Karanpura). The company thus cut its FY11 volume guidance from
445 mn t to 428 mn t and its FY12 guidance from 487 mn t to 447 mn t.
Management clarified these were not conservative but realistic
numbers. We have accordingly cut our volume estimates (Figure 1).
How significant can pricing be for profitability?
As we have been flagging over the past several months, e-auction
prices have risen sharply – from 56% above notified prices in FY10 to
81% in 9M FY11 and 93% in December 2010. CIL is also planning to
raise its e-auction volume share from 11.6% in FY10 to over 12% in
FY12. We accordingly increase our ASP estimates slightly (Figure 1).
Management indicated that the government is clearly reluctant to give
an early go-ahead for price increases due to concerns on inflation.
Coal India expects to take the increases by July 2011, when the new
wage contracts become effective. With the increase in dearness
allowances, part of the potential increase in costs is already visible.
This has not yet impacted EBITDA/t, mainly due to better efficiency
and higher e-auction prices. We have built in a 3-5% increase in FY12
prices (little change in EBITDA/t). There can be upside to our
estimates if price increases are higher than our expectation (last
increase was 11% YoY).
CIL is also seeking approval for differential pricing, i.e., limiting notified
prices to only sectors where prices are regulated. For others, it seeks
to benchmark prices to prevailing international prices.
Other takeaways
● Wage increases for workers are likely to be more than the 30%
seen in the last hike. Negotiations are still on.
● FY11 tax rate to be 31%, as all subsidiaries are likely to be
profitable. ECL was loss-making in 9M – the reason 9M tax rate is
higher. 4Q taxes should thus be lower.
● CIL hopes to tender out 11 washeries with total capacity of about
65-70 mn t. These are likely to get commissioned by FY14-15.
● The government will issue guidelines for foreign acquisitions by
public sector units, pending which CIL is unlikely to deploy any
cash for acquiring coal assets abroad.
We cut our EPS estimates by 3% each for FY11-13. As we roll
forward our DCF, our fair value remains Rs350. We maintain our
OUTPERFORM rating
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India------------------------------------------------------------------------Maintain OUTPERFORM
Volume guidance disappointing; profitability drivers though are intact
● On 16 February, CIL held a conference call on results declared on
14 February.
● Despite some visibility on lifting of the CEPI-triggered ban, volume
guidance was revised down sharply: 445 mn t to 428 mn t in FY11
and 487 mn t to 447 mn t in FY12. Even after the CEPI block is
lifted, clearance could take a while. In addition, the evacuation
infrastructure is a serious constraint, and so are law and order
issues around some mines.
● At the same time, e-auction prices are up sharply. Despite a pick
up in costs, well flagged to the government in consultation for
price increases (expected July 2011), profitability has so far not
been impacted. If price increases are taken on time, our EBITDA/t
estimates can have an upside.
● We cut our volume growth estimates, but increase our price
assumption marginally to build in higher e-auction prices and
slightly higher e-auction volumes. This improves our EBITDA/t,
and largely offsets the decline in volumes. We cut our FY11-13
EPS by 3% each. Our DCF-derived target price, rolled forward,
remains Rs350. We maintain OUTPERFORM
Volume troubles continue despite lifting of CEPI overhang
Over the past two weeks, there have been several interactions
between the Minister for Environment and Forests (MoEF) and the
Coal Minister. As reported widely in the news, in a vindication of Coal
India’s stand of escalating the approval delays, it is likely that in the
end-March review, the CEPI-triggered block on accepting CIL’s
expansion plans will be lifted. Similarly, many of the “no go” areas are
being re-evaluated by the MoEF.
Management explained though that this would not immediately lead to
a pick up in volumes. The CEPI-related block was on MoEF accepting
CIL’s expansion plans for review – with the block lifted, the plans will
be resubmitted for the ministry’s approval. In the interim, CIL will work
on improving its infrastructure. The full impact of these volumes will
thus only come in FY13.
At the same time, CIL has been facing several other constraints – that
of getting sufficient rakes from the railways, as well as law and order
issues in its subsidiaries MCL (Talcher coal-field) and SECL (North
Karanpura). The company thus cut its FY11 volume guidance from
445 mn t to 428 mn t and its FY12 guidance from 487 mn t to 447 mn t.
Management clarified these were not conservative but realistic
numbers. We have accordingly cut our volume estimates (Figure 1).
As we have been flagging over the past several months, e-auction
prices have risen sharply – from 56% above notified prices in FY10 to
81% in 9M FY11 and 93% in December 2010. CIL is also planning to
raise its e-auction volume share from 11.6% in FY10 to over 12% in
FY12. We accordingly increase our ASP estimates slightly (Figure 1).
Management indicated that the government is clearly reluctant to give
an early go-ahead for price increases due to concerns on inflation.
Coal India expects to take the increases by July 2011, when the new
wage contracts become effective. With the increase in dearness
allowances, part of the potential increase in costs is already visible.
This has not yet impacted EBITDA/t, mainly due to better efficiency
and higher e-auction prices. We have built in a 3-5% increase in FY12
prices (little change in EBITDA/t). There can be upside to our
estimates if price increases are higher than our expectation (last
increase was 11% YoY).
CIL is also seeking approval for differential pricing, i.e., limiting notified
prices to only sectors where prices are regulated. For others, it seeks
to benchmark prices to prevailing international prices.
Other takeaways
● Wage increases for workers are likely to be more than the 30%
seen in the last hike. Negotiations are still on.
● FY11 tax rate to be 31%, as all subsidiaries are likely to be
profitable. ECL was loss-making in 9M – the reason 9M tax rate is
higher. 4Q taxes should thus be lower.
● CIL hopes to tender out 11 washeries with total capacity of about
65-70 mn t. These are likely to get commissioned by FY14-15.
● The government will issue guidelines for foreign acquisitions by
public sector units, pending which CIL is unlikely to deploy any
cash for acquiring coal assets abroad.
We cut our EPS estimates by 3% each for FY11-13. As we roll
forward our DCF, our fair value remains Rs350. We maintain our
OUTPERFORM rating
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