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Coal India
Neutral
COAL.BO, COAL IN
Cutting FY12E on lower volumes; Differential pricing
key as wage agreement, inflation loom over the
horizon
• Cutting FY12-13E estimate on lower volumes; FY12E to be a choppy year:
We build in lower off-take for FY12-13E (~2% lower compared to earlier
estimates) and hence cut our EPS estimates by ~3% for FY12-13E (we are 2/7%
lower than consensus). We lower our March-12 PT (based on 7.5x FY13E
EV/EBITDA, we are not changing our target multiple) to Rs300 (Rs320
earlier). We believe FY12E is likely to be a choppy year for COAL, given a)
high inflation which could make notified coal price increases difficult and b)
wage revision which is due in June. While any final hike would take months of
negotiations, COAL would start providing in P&L, and hence would require an
off-setting notified coal price hike concurrently. We are building in volume off
take growth of 5.5/6% in FY12/13E.
• What is not in our forecasts: Any sharp increase in wagon availability or
potential leeway for COAL to invest in logistics infrastructure should lead to
higher off take growth going forward. We have not build in large differential
pricing for COAL from current levels (25% of sales value on market linked
coal prices), though we believe this could be one of the key levers for
increasing coal prices (essentially all customers with non regulated end
product pricing across various sectors pay quasi market linked pricing for
coal). Any sharp increase in dividend payout (we estimate at ~21%) would be
another positive given the net cash balance (FY13E at $13bn), though for this
we would need to see the largest shareholder (Govt) ask for higher dividends
(please see our report on this titled-‘ State Owned Miners: The problem of
excess cash - Higher payout ratios a possibility, even as acquisitions 'talked up',
dated 23rd Nov 2010)
• If the worst in terms of volume miss is in the price, is it time to buy? Not so
soon: At 15x FY12E P/E, we believe the key risk from here is essentially
COAL's inability to raise notified coal price hikes. While admittedly downside is
limited given the structural growth story, COAL could very much remain at the
current level for the next few months as buyers wait for clarity on price
increases before stepping in.
Remain Neutral, choppy H1FY12E likely
We revise our earnings estimates for COAL to factor in the volume miss in FY12E
from CEPI related production issues and lack of wagon availability impacting off
take. While CEPI related issues should ease in H2FY12E, we believe the H1FY12E
could likely be volatile given that the COAL would need to provide for wage hikes
via provisions (starting July), while high inflation could limit potential increase in
notified coal price increases. We expect coal production of 457/483MT in FY12/13E
and off take of 451/478MT in FY12/13E and EBITDA/MT of Rs335/354/MT in
FY12/13E. While CEPI related impact should ease into H2 (we expect COAL to get
relief under CEPI in March-11), rake availability would be the key driver for off take
growth. YTD rake availability stood at 158.12 v/s projected requirement of 183.56
for FY11E and 151.62 for the same period last year (full year rake availability stood
at 156.8 per day). E-auction premiums should remain at elevated levels given higher
global coal prices, though significant pick up in e-auction coal volume sales looks
difficult given FSA agreements, logistics issues. We remain Neutral with a revised
March-12PT of Rs300.
Differential coal pricing key to positive earnings surprise in
FY12-13E
Going forward an increase in volume sold on a quasi market pricing of coal would be
positive. As per COAL the company ~25% of sales are on market pricing of coal (on
volume terms it would be 16%), including ~11% on e-auction volumes, coking coal
sales, and higher grade A-C grade coal and beneficiated coal volumes. Going
forward we believe one of the key levers for COAL to increase ASP would be to sell
more of its coal to non regulated customers on market prices. These customers could
include CPP, merchant power plants, steel companies, cement plants, etc. This is not
in our base case, and any move towards differential prices would be a key positive.
Recent MOEF easing positive for longer term prod growth
We believe the recent MOEF easing in terms of regulatory approvals is positive for
the long term production growth outlook for the company. Easing of CEPI related
issues, would impact positively only from H2FY12E and not before that.
Long term off take growth a function on logistics growth
As the environment related issues likely to ease, development of logistics
infrastructure (chiefly railways) remains key for COAL to achieve +6% off take
growth. We believe at some point the increasing coal deficit would compel the
regulatory authorities to push for increased investment in logistics infrastructure,
though the benefits of this would glow through with a lag (of at least 12-18 months
for wagons). The FY11 Indian Railways budget had called for acquisition of 18000
new wagons.
No clarity on overseas acquisitions, increased pay out
ratios
While management has publicly talked about overseas acquisitions, there is no clarity
on timelines for the same. We are not building in any acquisition in our estimates.
Given the increasing cash balance, increased pay out ratio would be a strong positive,
though we believe for this, the largest shareholder (the Government of India) would
need to be vocal on this.
Risks to rating and PT
Key upside risks are a) sharp increase in wagon availability and b) higher prices for
non regulated customers while downside risks are a) higher wage provisions without
any hike in notified coal price increases and b) reduction in e-auction coal volume
sales
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India
Neutral
COAL.BO, COAL IN
Cutting FY12E on lower volumes; Differential pricing
key as wage agreement, inflation loom over the
horizon
• Cutting FY12-13E estimate on lower volumes; FY12E to be a choppy year:
We build in lower off-take for FY12-13E (~2% lower compared to earlier
estimates) and hence cut our EPS estimates by ~3% for FY12-13E (we are 2/7%
lower than consensus). We lower our March-12 PT (based on 7.5x FY13E
EV/EBITDA, we are not changing our target multiple) to Rs300 (Rs320
earlier). We believe FY12E is likely to be a choppy year for COAL, given a)
high inflation which could make notified coal price increases difficult and b)
wage revision which is due in June. While any final hike would take months of
negotiations, COAL would start providing in P&L, and hence would require an
off-setting notified coal price hike concurrently. We are building in volume off
take growth of 5.5/6% in FY12/13E.
• What is not in our forecasts: Any sharp increase in wagon availability or
potential leeway for COAL to invest in logistics infrastructure should lead to
higher off take growth going forward. We have not build in large differential
pricing for COAL from current levels (25% of sales value on market linked
coal prices), though we believe this could be one of the key levers for
increasing coal prices (essentially all customers with non regulated end
product pricing across various sectors pay quasi market linked pricing for
coal). Any sharp increase in dividend payout (we estimate at ~21%) would be
another positive given the net cash balance (FY13E at $13bn), though for this
we would need to see the largest shareholder (Govt) ask for higher dividends
(please see our report on this titled-‘ State Owned Miners: The problem of
excess cash - Higher payout ratios a possibility, even as acquisitions 'talked up',
dated 23rd Nov 2010)
• If the worst in terms of volume miss is in the price, is it time to buy? Not so
soon: At 15x FY12E P/E, we believe the key risk from here is essentially
COAL's inability to raise notified coal price hikes. While admittedly downside is
limited given the structural growth story, COAL could very much remain at the
current level for the next few months as buyers wait for clarity on price
increases before stepping in.
Remain Neutral, choppy H1FY12E likely
We revise our earnings estimates for COAL to factor in the volume miss in FY12E
from CEPI related production issues and lack of wagon availability impacting off
take. While CEPI related issues should ease in H2FY12E, we believe the H1FY12E
could likely be volatile given that the COAL would need to provide for wage hikes
via provisions (starting July), while high inflation could limit potential increase in
notified coal price increases. We expect coal production of 457/483MT in FY12/13E
and off take of 451/478MT in FY12/13E and EBITDA/MT of Rs335/354/MT in
FY12/13E. While CEPI related impact should ease into H2 (we expect COAL to get
relief under CEPI in March-11), rake availability would be the key driver for off take
growth. YTD rake availability stood at 158.12 v/s projected requirement of 183.56
for FY11E and 151.62 for the same period last year (full year rake availability stood
at 156.8 per day). E-auction premiums should remain at elevated levels given higher
global coal prices, though significant pick up in e-auction coal volume sales looks
difficult given FSA agreements, logistics issues. We remain Neutral with a revised
March-12PT of Rs300.
Differential coal pricing key to positive earnings surprise in
FY12-13E
Going forward an increase in volume sold on a quasi market pricing of coal would be
positive. As per COAL the company ~25% of sales are on market pricing of coal (on
volume terms it would be 16%), including ~11% on e-auction volumes, coking coal
sales, and higher grade A-C grade coal and beneficiated coal volumes. Going
forward we believe one of the key levers for COAL to increase ASP would be to sell
more of its coal to non regulated customers on market prices. These customers could
include CPP, merchant power plants, steel companies, cement plants, etc. This is not
in our base case, and any move towards differential prices would be a key positive.
Recent MOEF easing positive for longer term prod growth
We believe the recent MOEF easing in terms of regulatory approvals is positive for
the long term production growth outlook for the company. Easing of CEPI related
issues, would impact positively only from H2FY12E and not before that.
Long term off take growth a function on logistics growth
As the environment related issues likely to ease, development of logistics
infrastructure (chiefly railways) remains key for COAL to achieve +6% off take
growth. We believe at some point the increasing coal deficit would compel the
regulatory authorities to push for increased investment in logistics infrastructure,
though the benefits of this would glow through with a lag (of at least 12-18 months
for wagons). The FY11 Indian Railways budget had called for acquisition of 18000
new wagons.
No clarity on overseas acquisitions, increased pay out
ratios
While management has publicly talked about overseas acquisitions, there is no clarity
on timelines for the same. We are not building in any acquisition in our estimates.
Given the increasing cash balance, increased pay out ratio would be a strong positive,
though we believe for this, the largest shareholder (the Government of India) would
need to be vocal on this.
Risks to rating and PT
Key upside risks are a) sharp increase in wagon availability and b) higher prices for
non regulated customers while downside risks are a) higher wage provisions without
any hike in notified coal price increases and b) reduction in e-auction coal volume
sales
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