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Coal India Limited — Strong fundamentals,
valuation upside limited
Price Objective Change
Raising est. & PO on higher coal prices, Maintain Neutral
We raise our FY11-12e EPS by 4-9% as we raise CIL FY11-12e ASP by 2-5%
due to higher than expected coal price hikes announced by CIL recently. The
price hikes mitigates fears around CIL’s ability to hike prices amidst high inflation
to offset expected wage cost hikes. The new tiered pricing structure limits the
impact on the sensitive power sector. While the news flows on project approvals
have improved recently, logistics remains the bigger constraint to volume growth
in our view. CIL is up 16% since the price hike. Our revised NPV estimate for CIL
of Rs360 (9x FY12E OBR adj EBITDA) implies only 7% upside potential. Hence
Neutral.
CIL’s ASP increases by 13%, limits impact on power sector
CIL has recently raised coal prices for 1) high grade A & B coal (7% of vols.,
mainly non power) by 2-3x setting it at ~15% discount to import parity; 2) non
power sector (~20% of vols.) across subsidiaries excl. Mahanadi Coalfields (MCL)
by 30%; 3) MCL coal (25% of vols.) by 18% for power sector & by 48% for non
power sector. CIL has been selling ~5mt of high grade coal close to import parity,
but the new pricing formalizes the linkage of high grade coal to import parity.
Positive approval news flow; logistics a bigger constraint
Environment ministry has approved 14 projects recently. Coal ministry has
requested for CEPI restrictions to be relaxed. This could lead to potential upsides
to CIL’s FY12 output target of 447mt. However offtake is likely to be constrained
by rake availability – around 9-10 additional rakes are required in FY12 shipment
targets. We forecast dispatches of 428mt in FY11 & 444mt in FY12.
Catalysts: Further price hikes in FY12e & mining tax
A bull case scenario assuming another 4% hike in coal ASP in FY12e & higher
volumes due to CEPI restriction relaxation could lift our NPV est. to Rs405, (20%
upside potential), all else being equal. A bear scenario of flat volumes, higher
wage costs and mining tax could lower our NPV estimate to Rs270 (20%
downside risk), all else being equal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Limited — Strong fundamentals,
valuation upside limited
Price Objective Change
Raising est. & PO on higher coal prices, Maintain Neutral
We raise our FY11-12e EPS by 4-9% as we raise CIL FY11-12e ASP by 2-5%
due to higher than expected coal price hikes announced by CIL recently. The
price hikes mitigates fears around CIL’s ability to hike prices amidst high inflation
to offset expected wage cost hikes. The new tiered pricing structure limits the
impact on the sensitive power sector. While the news flows on project approvals
have improved recently, logistics remains the bigger constraint to volume growth
in our view. CIL is up 16% since the price hike. Our revised NPV estimate for CIL
of Rs360 (9x FY12E OBR adj EBITDA) implies only 7% upside potential. Hence
Neutral.
CIL’s ASP increases by 13%, limits impact on power sector
CIL has recently raised coal prices for 1) high grade A & B coal (7% of vols.,
mainly non power) by 2-3x setting it at ~15% discount to import parity; 2) non
power sector (~20% of vols.) across subsidiaries excl. Mahanadi Coalfields (MCL)
by 30%; 3) MCL coal (25% of vols.) by 18% for power sector & by 48% for non
power sector. CIL has been selling ~5mt of high grade coal close to import parity,
but the new pricing formalizes the linkage of high grade coal to import parity.
Positive approval news flow; logistics a bigger constraint
Environment ministry has approved 14 projects recently. Coal ministry has
requested for CEPI restrictions to be relaxed. This could lead to potential upsides
to CIL’s FY12 output target of 447mt. However offtake is likely to be constrained
by rake availability – around 9-10 additional rakes are required in FY12 shipment
targets. We forecast dispatches of 428mt in FY11 & 444mt in FY12.
Catalysts: Further price hikes in FY12e & mining tax
A bull case scenario assuming another 4% hike in coal ASP in FY12e & higher
volumes due to CEPI restriction relaxation could lift our NPV est. to Rs405, (20%
upside potential), all else being equal. A bear scenario of flat volumes, higher
wage costs and mining tax could lower our NPV estimate to Rs270 (20%
downside risk), all else being equal.
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