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Volumes under pressure: Management cited that shortage of railway rakes was hurting off-take
and it was expecting FY11 off-take volumes to be 428mt. With current inventory already at 57mt,
it expects production volumes to be kept to around 435mt.
Shortage of railway rakes hurting off-take
Coal India management highlighted that it is currently facing a severe shortage of railway
rakes. Average rake availability till Dec 10 was 163 rakes/day against requirement of 185
rakes/day. In 4QFY11 so far, shortage of rakes has been even more acutely felt when
production normally peaks. Management indicated that they might only be able to achieve offtake
of 428mt for FY11. (our estimate: 446mt) Consequently, inventories after declining from
63mt in FY10 to 50mt by Dec 2010, has now increased to around 57mt. Due to difficulty of
storing coal (risk of catching fire etc), management does not want to increase inventory much
beyond FY10 levels of 63mt. Hence, production volumes are expected to be kept to about
435mt. (our estimate: 431mt).
Dependence on railways to continue
The company delivers about 49% of output through railways, 27% by road, 20% by MGR and
balance by conveyor belt. According to the company, railways have placed orders for
additional wagons which could add about 7 rakes/day to the 163 rakes/day it currently gets.
Current railway policy also prohibits coal producers from developing their own railway
stock/wagons though coal consumers are allowed to do so. Growth through dispatch by road
(used for distances typically less than 100km) is also impacted with travel restricted from 6am
to 6pm in most areas. CEPI norms could be relaxed, but FY12F volumes may not recover.
Meetings with environment ministry on coal mining expansion due to CEPI
Coal India has had to cut is FY12 production target by 39mt to 447mt entirely due to the
impact of (Comprehensive Environment Pollution Index) CEPI. While management indicated
that meetings were positive and CEPI norms may be relaxed, they clarified that CEPI brought
about a status-quo on all expansion plans approvals processes at these mines and even if the
embargo is lifted soon, it may not add to volumes in FY12.
Long term outlook toned down
Considering the environmental and evacuation issues, for the 12th five year plan till FY17F,
management indicated a production growth of around 5-5.5% pa, lower than the 7-8%pa it
targeted during the IPO. We have forecasted a 3.1% CAGR for FY10-15F.
E-auction volumes may not increase beyond 11-12% levels
E-auction volumes for the fiscal year till date have been close to 12%, taking advantage of
high spot prices. Realisations achieved a premium of 81% over notified prices for the 9
months ended Dec 2010 and 94% for December alone. However, management indicated the
proportion may not increase beyond these levels due to current FSA commitments.
Considering differential pricing, but to take time
Management highlighted that they are looking at differential price notification for different enduse
customers as opposed to using the same notification structure for end consumers like
utilities and cement manufacturers. They have reportedly started informing the coal ministry
regarding the same. We do not expect this to play out in the short to medium term.
Washery capex plans update
Out of the 20 washeries planned, 4 are at a relatively advanced stage and management
expects these to come on-line by FY13. It was highlighted that it takes 30 months from zero
date till commissioning. Notably, zero date is a function of environmental clearance which is
yet to be obtained for any of these washeries. A positive development is the clubbing of the
pre-qualification criteria for 11 of the remaining washeries which will help expedite the
process.
Likely to start provisioning for wage hike from July 2011
With inflation ruling high, the company's employee costs have been proportionally increasing.
Dearness allowance (which is a function of CPI index) has increased from 27.7% of basic
salary at the time of the last notified price revision (Oct 2009) to 49.9% now. Cost of
production has increased by 7-8% on this account. Meetings with unions are expected to
commence shortly on the quantum of the wage hike scheduled for July 2011. The company is
likely to provision for an increase this time, even if discussions with unions take longer to
finalize.
Coal import plans
The company is in discussions with global coal miners to enter into an annual off-take
agreement to import coal. The company is planning a consortium with Shipping Corporation
of India and the Indian Railways so that coal can be delivered at the consumption point. Coal
India hopes to get a discount from the index price because of the significant volumes.
However, we believe margins from these volumes would be significantly lower compared to
current levels and volumes may not be that material at least initially considering the
company's size.
Overseas acquisition update
With cash of US$10bn and domestic growth options constrained, management has been
having discussions with multiple players for investing in their global coal assets. However,
with coal markets volatile, expectation of sellers has also increased. Coal India is also
considering the risks involved in overseas asset exposure as compared to the fixed margin it
is assured of, if it uses the coal import route.
We have a SELL rating on Coal India with target price of Rs270.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volumes under pressure: Management cited that shortage of railway rakes was hurting off-take
and it was expecting FY11 off-take volumes to be 428mt. With current inventory already at 57mt,
it expects production volumes to be kept to around 435mt.
Shortage of railway rakes hurting off-take
Coal India management highlighted that it is currently facing a severe shortage of railway
rakes. Average rake availability till Dec 10 was 163 rakes/day against requirement of 185
rakes/day. In 4QFY11 so far, shortage of rakes has been even more acutely felt when
production normally peaks. Management indicated that they might only be able to achieve offtake
of 428mt for FY11. (our estimate: 446mt) Consequently, inventories after declining from
63mt in FY10 to 50mt by Dec 2010, has now increased to around 57mt. Due to difficulty of
storing coal (risk of catching fire etc), management does not want to increase inventory much
beyond FY10 levels of 63mt. Hence, production volumes are expected to be kept to about
435mt. (our estimate: 431mt).
Dependence on railways to continue
The company delivers about 49% of output through railways, 27% by road, 20% by MGR and
balance by conveyor belt. According to the company, railways have placed orders for
additional wagons which could add about 7 rakes/day to the 163 rakes/day it currently gets.
Current railway policy also prohibits coal producers from developing their own railway
stock/wagons though coal consumers are allowed to do so. Growth through dispatch by road
(used for distances typically less than 100km) is also impacted with travel restricted from 6am
to 6pm in most areas. CEPI norms could be relaxed, but FY12F volumes may not recover.
Meetings with environment ministry on coal mining expansion due to CEPI
Coal India has had to cut is FY12 production target by 39mt to 447mt entirely due to the
impact of (Comprehensive Environment Pollution Index) CEPI. While management indicated
that meetings were positive and CEPI norms may be relaxed, they clarified that CEPI brought
about a status-quo on all expansion plans approvals processes at these mines and even if the
embargo is lifted soon, it may not add to volumes in FY12.
Long term outlook toned down
Considering the environmental and evacuation issues, for the 12th five year plan till FY17F,
management indicated a production growth of around 5-5.5% pa, lower than the 7-8%pa it
targeted during the IPO. We have forecasted a 3.1% CAGR for FY10-15F.
E-auction volumes may not increase beyond 11-12% levels
E-auction volumes for the fiscal year till date have been close to 12%, taking advantage of
high spot prices. Realisations achieved a premium of 81% over notified prices for the 9
months ended Dec 2010 and 94% for December alone. However, management indicated the
proportion may not increase beyond these levels due to current FSA commitments.
Considering differential pricing, but to take time
Management highlighted that they are looking at differential price notification for different enduse
customers as opposed to using the same notification structure for end consumers like
utilities and cement manufacturers. They have reportedly started informing the coal ministry
regarding the same. We do not expect this to play out in the short to medium term.
Washery capex plans update
Out of the 20 washeries planned, 4 are at a relatively advanced stage and management
expects these to come on-line by FY13. It was highlighted that it takes 30 months from zero
date till commissioning. Notably, zero date is a function of environmental clearance which is
yet to be obtained for any of these washeries. A positive development is the clubbing of the
pre-qualification criteria for 11 of the remaining washeries which will help expedite the
process.
Likely to start provisioning for wage hike from July 2011
With inflation ruling high, the company's employee costs have been proportionally increasing.
Dearness allowance (which is a function of CPI index) has increased from 27.7% of basic
salary at the time of the last notified price revision (Oct 2009) to 49.9% now. Cost of
production has increased by 7-8% on this account. Meetings with unions are expected to
commence shortly on the quantum of the wage hike scheduled for July 2011. The company is
likely to provision for an increase this time, even if discussions with unions take longer to
finalize.
Coal import plans
The company is in discussions with global coal miners to enter into an annual off-take
agreement to import coal. The company is planning a consortium with Shipping Corporation
of India and the Indian Railways so that coal can be delivered at the consumption point. Coal
India hopes to get a discount from the index price because of the significant volumes.
However, we believe margins from these volumes would be significantly lower compared to
current levels and volumes may not be that material at least initially considering the
company's size.
Overseas acquisition update
With cash of US$10bn and domestic growth options constrained, management has been
having discussions with multiple players for investing in their global coal assets. However,
with coal markets volatile, expectation of sellers has also increased. Coal India is also
considering the risks involved in overseas asset exposure as compared to the fixed margin it
is assured of, if it uses the coal import route.
We have a SELL rating on Coal India with target price of Rs270.
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