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On February 25th 2011, Coal India (CIL) announced an increase in its coal prices for
specific customers and specific grades of coal. There were three sets of increase in coal
prices that was announced as given below:
• An increase of c. 30% in thermal coal prices for customers other than power, IPP,
fertilizers and defense sectors. Coal India sells approximately 20% of its total thermal
coal output to non priority sectors that include steel, cement, aluminium and other
captive power producers. We estimate that atleast c. 80 mn MT will be impacted by this
price rise.
• Increase in prices of non coking coal from Mahanadi Coalfields Ltd (MCL) to bring it on
par with South Eastern Coalfields Ltd (SECL). The price increase is roughly 12% to 24%
compared with previous year. MCL produces c. 109mn MT of thermal coal equal to
c.25% of total coal production of CIL.
• Increase of Grade A & B non coking coal prices in par with landed international prices.
The increases in prices are at c.50% higher compared with FY11.
• Prices of coking coal have also been increased by an average of 12-18% to bring it in
line with the market price.
The price increase was made just before the current Chairman Mr. Partha Bhattacharya
attained his superannuation from his post in CIL on 28th February 2011. The price increase
was a surprise as we expected it to happen during June 2011 at the time of wage
settlement. We have revised our thermal coal and coking coal prices for FY12E and future
years. We have increased our assumptions for manpower costs and other costs to reflect
higher costs expected in FY12E. We do not anticipate any price increase in June 2011. We
retain our production (c.454mn) and sales numbers to reflect the lower volumes
anticipated in FY12E. We revise our target price from INR 308 to INR 370 due to
above changes and revise our rating from ‘Neutral’ to ‘Buy on decline’.
Valuations and recommendations: International Asian coal miners trade at 10.1x
CY11E EV/EBITDA and 7.3x CY12E EV/EBITDA. At CMP of INR 325, CIL trades at 13.0x
FY11E EV/EBITDA and 8.3x FY12E EV/EBITDA respectively, c. 14% premium over
international peers. Our DCF value for CIL is at INR 424 including INR 361 per share for its
coal assets plus INR 63 as cash per share. Considering CIL’s superior ROE and improving
margins we continue to assign CIL 8.0x FY12E EV/EBITDA at INR 315 per share. We
value CIL at average of DCF (INR 424) and 8x FY12E EV/EBITDA (INR 315) at
INR 370 per share. We recommend a ‘Buy on decline’ on CIL with a target price
of INR 370, an upside of c.14%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
On February 25th 2011, Coal India (CIL) announced an increase in its coal prices for
specific customers and specific grades of coal. There were three sets of increase in coal
prices that was announced as given below:
• An increase of c. 30% in thermal coal prices for customers other than power, IPP,
fertilizers and defense sectors. Coal India sells approximately 20% of its total thermal
coal output to non priority sectors that include steel, cement, aluminium and other
captive power producers. We estimate that atleast c. 80 mn MT will be impacted by this
price rise.
• Increase in prices of non coking coal from Mahanadi Coalfields Ltd (MCL) to bring it on
par with South Eastern Coalfields Ltd (SECL). The price increase is roughly 12% to 24%
compared with previous year. MCL produces c. 109mn MT of thermal coal equal to
c.25% of total coal production of CIL.
• Increase of Grade A & B non coking coal prices in par with landed international prices.
The increases in prices are at c.50% higher compared with FY11.
• Prices of coking coal have also been increased by an average of 12-18% to bring it in
line with the market price.
The price increase was made just before the current Chairman Mr. Partha Bhattacharya
attained his superannuation from his post in CIL on 28th February 2011. The price increase
was a surprise as we expected it to happen during June 2011 at the time of wage
settlement. We have revised our thermal coal and coking coal prices for FY12E and future
years. We have increased our assumptions for manpower costs and other costs to reflect
higher costs expected in FY12E. We do not anticipate any price increase in June 2011. We
retain our production (c.454mn) and sales numbers to reflect the lower volumes
anticipated in FY12E. We revise our target price from INR 308 to INR 370 due to
above changes and revise our rating from ‘Neutral’ to ‘Buy on decline’.
Valuations and recommendations: International Asian coal miners trade at 10.1x
CY11E EV/EBITDA and 7.3x CY12E EV/EBITDA. At CMP of INR 325, CIL trades at 13.0x
FY11E EV/EBITDA and 8.3x FY12E EV/EBITDA respectively, c. 14% premium over
international peers. Our DCF value for CIL is at INR 424 including INR 361 per share for its
coal assets plus INR 63 as cash per share. Considering CIL’s superior ROE and improving
margins we continue to assign CIL 8.0x FY12E EV/EBITDA at INR 315 per share. We
value CIL at average of DCF (INR 424) and 8x FY12E EV/EBITDA (INR 315) at
INR 370 per share. We recommend a ‘Buy on decline’ on CIL with a target price
of INR 370, an upside of c.14%.
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