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Coal India (COAL)
Metals & Mining
Maximizing benefits, minimizing impact. According to media reports, Coal India Ltd
(CIL) has raised prices by ~12-15% with immediate effect. The price increase is not
broad-based (as has been the case previously), but has been selectively imposed on
notified prices of MCL and for select consumer segments, insulating to a larger extent
the politically sensitive power sector. We reiterate our positive stance noting earlierthan-
anticipated price revision. Maintain ADD rating with target price of Rs345/share.
Structured price increase targets pockets of opportunity—yielding price increase of 12-15%
Unlike the conventional broad-based price increase across categories, CIL has likely revised coal
prices for the following (1) 15-20% increase in notified price for Mahanadi Coal Fields (24% of
sales), addressing the disparity in prices compared to SECL, (2) floor price at 30% premium to
notified price for e-auction sales, and (3) 30% premium over notified price for all consumers
whose end-products are sold under market determined price—non-power contributes 20% of
sales. The overall improvement could likely yield ~12-15% price increase for FY2012E (7%
factored currently) and improving earnings by ~15-23%, without impacting the pricing to the
politically sensitive power sector.
Volume growth could sweeten the party—striking a balance between growth and environment
MoEF stipulated constraints have so far contained volume growth, though recent media reports
indicate that MoEF has agreed to dilute environmental norms for 16 coal blocks and indicated that
the CEPI moratorium could be lifted by March 2011. We see limited downside risk to our volume
estimates as we already factor in the production target cuts on account of slippages in capacity
ramp-up due to environmental constraints. Our sale estimates of 426 mn tons in FY2011E are
aligned to management’s guidance, though we continue to build moderately higher sales of 452
mn tons in FY2012E—implying a target miss of 34 mn tons compared to 39 mn tons miss guided
by the management.
Increasing frequency of price revisions signals improving pricing power
CIL’s current price increase comes barely 16 months after the last price increase taken in October
2009, signaling an improving pricing power and strengthening our confidence on CIL’s ability to
narrow the pricing gap between domestic coal prices and prices of imported coal. We maintain
our ADD rating and target price of Rs345/share, and will review our estimates once we have clarity
on the structure and quantum of price increases. Our target price is based on 13X FY2012E EPS
adjusted for overburden removal and interest income and implies an EV/EBITDA of 9.5X on
FY2012E EBITDA (adjusted for overburden removal). CIL currently trades at 15X FY2012E EPS
(reported) and 9.3X FY2012E EBITDA (reported).
MCL substantial contributor of extant and incremental production
We note that MCL contributed 24% of CIL’s sales in FY2010—though its average realization
at Rs635/ton is 40% lower than the blended realization of Rs1,075/ton earned by CIL. The
price increase is also relevant as MCL will be the largest contributor of incremental
production, and from extant base of 104 mn tons (24% of FY2010 production). The price
increase for MCL looks to address the pricing disparity between itself and SECL (MCL was
previously carved out of SECL), as can be seen in Exhibit 2 while Exhibit 3 shows the
production mix of MCL for FY2010 and targeted production mix for FY2017E.
In our view, the proposed 30% premium to notified prices for e-auction sales is less relevant
as e-auctions have traditionally commanded 50-80% premium over notified prices. However,
the proposed floor on pricing protects CIL’s realizations even in intermittent periods of a
weakness in the spot market. Exhibit 4 shows the trend of e-auction prices in recent times.
Cement and steel to bear the brunt, impact on merchant power capacities
uncertain
In order to restrict the impact on the power sector, CIL has effected a price increase only to
sectors whose products are not governed by a regulated pricing regime. As such the cement
and steel sector will likely have to pay a 30% premium over notified prices compensating for
no price increase for the power sector (barring the notified price increase in MCL). We note
that the cement sector consumes met up to 47% of its requirement at notified prices from
CIL. We note that among cement companies under coverage, ACC has a higher dependence
on domestic coal.
We remain unsure of the impact the price increases will have on merchant power plants and
captive power capacities, though our reading suggests that they will likely be impacted by
the revision in coal prices. We highlight that utilities like Lanco and Sterlite Industries will be
impacted by the notified price rise in MCL for the merchant sale of power from plants
located in Orissa, even if they escape the additional 30% premium that may or may not be
applicable to merchant power capacities.
Our target price implies an EV/EBITDA of 9.3X on FY2012E adjusted EBITDA
Target price computation of CIL
EBITDA (Rs bn) 148
OBR (Rs bn) 26
Adjusted EBITDA (Rs bn) 174
Interest income (Rs bn) 32
PAT (Rs bn) 129
Adjusted PAT (Rs bn) 125
EPS (Rs/share) 20
Adjusted EPS (Rs/share) 20
P/E on FY2012E adjusted PAT (X) 13
Value of coal business (Rs bn) 1,656
Cash (Rs bn) 525
Market Cap (Rs bn) 2,180
Target price 345
Notes.
(1) Adjusted EBITDA is calculated after removing the effect OBR adjustment.
(2) Adjusted PAT is calculating after removing the effect of
OBR adjustment and interest income net of taxes.
Source: Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India (COAL)
Metals & Mining
Maximizing benefits, minimizing impact. According to media reports, Coal India Ltd
(CIL) has raised prices by ~12-15% with immediate effect. The price increase is not
broad-based (as has been the case previously), but has been selectively imposed on
notified prices of MCL and for select consumer segments, insulating to a larger extent
the politically sensitive power sector. We reiterate our positive stance noting earlierthan-
anticipated price revision. Maintain ADD rating with target price of Rs345/share.
Structured price increase targets pockets of opportunity—yielding price increase of 12-15%
Unlike the conventional broad-based price increase across categories, CIL has likely revised coal
prices for the following (1) 15-20% increase in notified price for Mahanadi Coal Fields (24% of
sales), addressing the disparity in prices compared to SECL, (2) floor price at 30% premium to
notified price for e-auction sales, and (3) 30% premium over notified price for all consumers
whose end-products are sold under market determined price—non-power contributes 20% of
sales. The overall improvement could likely yield ~12-15% price increase for FY2012E (7%
factored currently) and improving earnings by ~15-23%, without impacting the pricing to the
politically sensitive power sector.
Volume growth could sweeten the party—striking a balance between growth and environment
MoEF stipulated constraints have so far contained volume growth, though recent media reports
indicate that MoEF has agreed to dilute environmental norms for 16 coal blocks and indicated that
the CEPI moratorium could be lifted by March 2011. We see limited downside risk to our volume
estimates as we already factor in the production target cuts on account of slippages in capacity
ramp-up due to environmental constraints. Our sale estimates of 426 mn tons in FY2011E are
aligned to management’s guidance, though we continue to build moderately higher sales of 452
mn tons in FY2012E—implying a target miss of 34 mn tons compared to 39 mn tons miss guided
by the management.
Increasing frequency of price revisions signals improving pricing power
CIL’s current price increase comes barely 16 months after the last price increase taken in October
2009, signaling an improving pricing power and strengthening our confidence on CIL’s ability to
narrow the pricing gap between domestic coal prices and prices of imported coal. We maintain
our ADD rating and target price of Rs345/share, and will review our estimates once we have clarity
on the structure and quantum of price increases. Our target price is based on 13X FY2012E EPS
adjusted for overburden removal and interest income and implies an EV/EBITDA of 9.5X on
FY2012E EBITDA (adjusted for overburden removal). CIL currently trades at 15X FY2012E EPS
(reported) and 9.3X FY2012E EBITDA (reported).
MCL substantial contributor of extant and incremental production
We note that MCL contributed 24% of CIL’s sales in FY2010—though its average realization
at Rs635/ton is 40% lower than the blended realization of Rs1,075/ton earned by CIL. The
price increase is also relevant as MCL will be the largest contributor of incremental
production, and from extant base of 104 mn tons (24% of FY2010 production). The price
increase for MCL looks to address the pricing disparity between itself and SECL (MCL was
previously carved out of SECL), as can be seen in Exhibit 2 while Exhibit 3 shows the
production mix of MCL for FY2010 and targeted production mix for FY2017E.
In our view, the proposed 30% premium to notified prices for e-auction sales is less relevant
as e-auctions have traditionally commanded 50-80% premium over notified prices. However,
the proposed floor on pricing protects CIL’s realizations even in intermittent periods of a
weakness in the spot market. Exhibit 4 shows the trend of e-auction prices in recent times.
Cement and steel to bear the brunt, impact on merchant power capacities
uncertain
In order to restrict the impact on the power sector, CIL has effected a price increase only to
sectors whose products are not governed by a regulated pricing regime. As such the cement
and steel sector will likely have to pay a 30% premium over notified prices compensating for
no price increase for the power sector (barring the notified price increase in MCL). We note
that the cement sector consumes met up to 47% of its requirement at notified prices from
CIL. We note that among cement companies under coverage, ACC has a higher dependence
on domestic coal.
We remain unsure of the impact the price increases will have on merchant power plants and
captive power capacities, though our reading suggests that they will likely be impacted by
the revision in coal prices. We highlight that utilities like Lanco and Sterlite Industries will be
impacted by the notified price rise in MCL for the merchant sale of power from plants
located in Orissa, even if they escape the additional 30% premium that may or may not be
applicable to merchant power capacities.
Our target price implies an EV/EBITDA of 9.3X on FY2012E adjusted EBITDA
Target price computation of CIL
EBITDA (Rs bn) 148
OBR (Rs bn) 26
Adjusted EBITDA (Rs bn) 174
Interest income (Rs bn) 32
PAT (Rs bn) 129
Adjusted PAT (Rs bn) 125
EPS (Rs/share) 20
Adjusted EPS (Rs/share) 20
P/E on FY2012E adjusted PAT (X) 13
Value of coal business (Rs bn) 1,656
Cash (Rs bn) 525
Market Cap (Rs bn) 2,180
Target price 345
Notes.
(1) Adjusted EBITDA is calculated after removing the effect OBR adjustment.
(2) Adjusted PAT is calculating after removing the effect of
OBR adjustment and interest income net of taxes.
Source: Kotak Institutional Equities estimates
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