Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Limited
More Positive News Flow in
the Offing; Stay Overweight
What's Changed
Price Target Rs387.00 to Rs425.00
F11-F13 EPS Increased 5-6%
The Street may be positively surprised by Coal India
on announced price increases and production-related
news flow: Although the stock has outperformed the
Sensex by ~25% YTD, we expect further upside and are
raising our PT to Rs425, which implies potential upside
of 19% from current levels..
In our view, with the exception of the Street, every
stakeholder firmly believes in CIL’s ability to raise
coal prices. We expect CIL’s average price to increase
by 17% in F2012 and 10% in F2013. Our stance is been
buttressed by CIL’s price hike (of about 12.9%) in late
February 2011. More important, CIL appears to be
successfully setting a rational and acceptable modality
for its future price increases.
Why raise prices? 1) To beat cost inflation due to wage
hikes likely to come by July 2011, and other higher costs.
We model an average price hike of 9% from January 9,
2011. 2) Compensation for production loss – a new and
seemingly potent argument from CIL. 3) Save the
regulated part of the power industry, CIL believes all
consumers should pay import parity price. While this is
not new, we find CIL’s focus on this is encouraging.
Modality of price increases: While price hikes for
e-auction and A and B grades are being pursued more
aggressively, CIL will also look to pass through a further
price hike for the non-power sector even though it will
likely raise prices for power sector in F2H12.
The likely bottoming out of pessimism on
production growth (as news flow on regulatory hurdles
improves) should aid valuation multiple expansion:
EV/EBITDA of 7.7x on F2012E indicates healthy upside
to us given our EBITDA CAGR of 32% in F2011-13E.
Investment Thesis
• The Street does not seem to
appreciate CIL’s ability to continue its
price advancement. As well,
abatement of regulatory hurdles to
volume growth should expand the
earnings multiple. Accordingly, we
find the stock attractive at EV/EBITDA
of 7.7x based on F2012e.
• Accelerating earnings growth: We
expect EBITDA CAGR of 32% in
F2011-13, with high visibility aided
primarily by pricing growth.
• Attractive vehicle for participating in
India’s economic growth story.
• Robust long-term positives: large
mine reserves, favorable geological
characteristics , and low production
costs
Key Value Drivers
• Higher international coal prices:
We estimate the notified price will
increase by 15% in F2012 and 9% in
F2013
• Change in product mix: We expect
the share of market-linked sales
volume to rise to 37% in F2013 from
22% in F2010.
• Increase in wage costs: We assume
a rise from Rs386/ton in F2010 to
Rs488/t in F2012.
• Production growth: We forecast
5.5% CAGR in F2011-13.
• Regulatory environment
Potential Catalysts
• We expect an increase in notified
prices in F2Q12 to accompany wage
revisions.
• Positive earnings surprise in 1H12.
Downside Risks
• The government does not allow CIL to
raise prices in the next two to three
years because of inflation concerns.
• CIL undertakes a large and
value-reducing acquisition abroad.
Investment Case
We are raising our PT for CIL to Rs425 from Rs387, indicating
an upside of 19% from current levels. We expect CIL to show
consistent EBITDA CAGR approaching 32% in F2011-13,
which would yield potential upside to an EV/EBITDA multiple of
7.7x on our F2012 estimates.
Apart from our positive stance on price increases (on notified
price increase, change in sales mix, and strong global coal
prices), we are becoming increasingly positive on CIL
emerging as a high dividend yield company by F2013, given its
large cash pile, low specific capex requirements, and the low
probability (in our view) of its making some big ticket
acquisition.
Apart from the revisions to our assumptions detailed in Exhibits
1 and 2, we have made the following changes to our model:
1. Increased the tax rate from 33% in each year to 36%
in F2011, 35% in F2012, and 34% in F2012. This is to
bring our expectations in line with the tax rate in first
nine months of F2011.
2. We now adjust the sales item “coal issued for other
purposes“ against the cost item “internal consumption
of coal “ (starting with F2H12) as the company has
done and since we feel it to be logical. A large part of
reduction in our net revenue forecast for F2011 is due
to this reason, although the change does not affect
the profitability. For F2012 and F2013, had it not been
for this adjustment, our net revenue forecasts would
have been higher versus our earlier model.
3. Having witnessed solid cost control from CIL in the
first nine months (and even in F3Q11 when the
overburden removal was not that low), we have
lowered our production cost forecasts.
Streets Focus Shifting from Volume to
Pricing Growth
Pricing trends can drive positive surprise: On
February 28, CIL raised prices on about 42% of its total off-take,
translating into an average 12.9% price growth. This price
increase was remarkable in the sense that regulated power
plants that are not consumers of coal from Mahanadi Coalfields
Ltd (MCL, which is amongst the largest 100%-owned
subsidiaries of CIL) were not affected. Also remarkable was the
lack of controversy with which the 15% price hike for MCL’s
power sector consumers was absorbed. This reinforces our
view that as long as CIL is pragmatic about its pricing strategy
and is not looking to squeeze its customers, it will not face
opposition to its planned price increases.
An increase in the cost of mining and higher international
prices since the last revision (October 2009) were the primary
factors behind the price hike. The Street was surprised by both
the differentiated nature of the price hike and the timing since
CIL had never taken such steps at such a time before. This
event also allayed some Street concerns that the government
was averse to allowing CIL to implement price increases owing
to inflationary concerns.
Interestingly, our interactions with investors suggest that a
number of them are not expecting a further price hike in F2012,
even post wage increases. Many investors are still of the view
that the February price hike was taken in anticipation of wage
negotiations and so after the new wages are implemented, CIL
may not need to raise prices again. We believe, however, that
there could be a positive surprise here, possibly in early F2H12,
as the higher salaries are due to go into effect on July 1, 2011
(still being negotiated with the unions). Moreover, we expect
CIL to raise coal prices for the regulated power sector at this
point as well, although likely by a relatively small amount.
Although we believe that the average price increase will be
sufficient to counter the entire 35% wage bill increase, we are
including only a partial offset, assuming a 9% average price
increase versus the 12% required to counter the full wage
increase.
We expect prices to increase 9% effective September 2011
due to the following:
1. Wage revisions effective July 1, 2011: We expect
CIL’s salary per head to increase by 35% p.a., leading
to a 26% (adjusted for only three quarters in F2012)
rise in employee cost for F2012 and 9% for F2013. To
put this in context, the wage increase is to be
implemented only for non-executive employees
(about 90% of total employee base), and we assume
that wage negotiations will result in a 39% increase for
non-executive employees. We feel that chances of
this being overshot are quite low.
2. Environmental issues curtailed volume growth by
almost 18mt in F2011: CIL should compensate for this
loss of production by increasing prices further. We no
to expect the government to oppose this move,
especially given the low price hike that CIL may
implement for power sector.
3. CIL’s price increase in F2H12 will again focus on
industries ex-regulated power: Since these
consumers sell their products (cement, steel, DRI,
coke or merchant power) in unregulated markets, the
opposition to such increases may not be high,
especially given the low base for CIL’s coal price
currently. In addition, many of these consumers
import their coal at substantially higher prices and
they may not mind much another 12-15% price hike if
they are assured of supplies from CIL. Even post a
price increase, we believe CIL’s coal will be slightly
cheaper than import parity prices.
4. Domestic and global shortage could aid CIL’s
average realizations since this is pushing up CIL’s
e-auction and A and B grade coal: The recent
earthquake in Japan and the related issues with its
nuclear power plants have led other nuclear powerdependent
countries such as Germany to implement
maintenance shut downs at their nuclear facilities.
This is expected to exacerbate the tightness in
thermal coal markets. We expect import-dependent
thermal coal buyers to purchase more from CIL’s
e-auction facility and be more willing to pay higher
prices, thus aiding CIL’s realizations. E-auction price
premium over notified prices was 81% in the first nine
months of F2011 and 93% in December 2010
compared to 56% in F2010. We expect e-auction
realizations to increase 24.3% YoY in F2012 and
expect the e-auction proportion to rise to 13.5% in
F2012 (11% in F2010.)
Volume Growth-related Pessimism Seems
to Be Bottoming Out
Although we maintain our stance that CIL is more of a play on
price increase rather than on production growth, in the medium
term we acknowledge that in late C2010, poor news flow on
volume growth compressed the stock’s valuations multiples.
Now that regulatory hurdles seem to be easing, volume
expectations should start inching up, and, accordingly, we
expect some improvement in valuations of the stock
We maintain our production estimates of 454mt in F2012 and
481mt in F2013 primarily due to:
• Regulatory hurdles relating to “No-go” areas and CEPI
categorization impeded production growth for CIL by
almost 18mt in F2011. However, in recent months, we
have seen the regulatory stance softening, leading to the
approvals and clearances of several projects.
Environment approval was recently granted to nine new
projects, and there is progress on approval of seven other
projects.
• Logistical bottlenecks caused mainly by unavailability of
railway rakes are reducing, at least in the near term.
Currently, 185 rakes (one rake typically has 58 freight rail
wagons) per day are being made available to CIL for coal
lifting compared to 175 in F1H11 and 168 in F2010.
Valuation
We are raising our price target to Rs425 from Rs387, implying
an upside of 19% from current levels and target F2012
multiples of 13.9 P/E and 7.7 EV/EBITDA. Our higher price
target primarily reflects the increase in our EBITDA forecasts of
13% in F2012, 10% in F2013, 11% in F2014, and 12% in
F2015.
To set our price target, we use a two-phase DCF model with an
explicit phase of five years and a terminal growth rate of 3%.
We assume an average realization of Rs1348/ton for F2012,
with a CAGR of 9% for the explicit phase and production of
454mt for F2012 with a CAGR of 6.7% for the explicit phase.
We derive a WACC of 13.0% for the company with a risk-free
rate of 7.9% (10-year government bond yield) and a
market-risk premium of 6.5%, in line with the recommendations
of our regional strategy team.
Downside Risks to Price Target
Risks to our price target include slower-than-expected price
increase, a sudden dip in industrial and economic activity in
India and globally, and an unfavorable regulatory environment.
Exhibit 6
WACC Calculation
WACC Calculation:
Risk Free Return (Rf) (%) 7.9
Market Premium (Rm-Rf) (%) 6.5
Assumed Beta 1.06
Cost of Equity (Re) (%) 14.8
Equity (%) 80
Cost of Debt (Rd) (%) 9.0
Tax rate (%) 33.8
After-tax cost of debt (Rd [1-t]) (%) 6.0
Debt (%) 20
WACC (%) 13.0
Source: Company data, Morgan Stanley Research
Exhibit 7
Beta Calculations
Typical Indian mining company beta (A) 1.17
Weighting of mining companies 0.75
NTPC's beta (B) 0.73
Weighting of NTPC beta 0.25
Weighted Average of A and B 1.06
Source: Company data, Morgan Stanley Research
Exhibit 8
DCF – Price Target of Rs425
Present value (as of 1 Dec, 2011) of the explicit phase (A) 905,981
Terminal growth rate (%) 3
Terminal value 2,313,356
Present value (as on 1st Dec 2011, of terminal value ( B) 1,360,952
Total present value (as on 1st Dec,2011 ) =( A+B) 2,266,933
Net debt as on F11 end (416,551)
Equity value (Rs m) 2,683,484
No of shares 6,316
Implied Equity value per share 425
Source: Company data, Morgan Stanley Research
Company Description
Coal India Limited is the largest coal producer in the world with
production of 431mt as of FY10. The company has the largest
reserve base in the world of around 19bt as per JORC
standards. Primarily an open-cast operator, the company has
nine subsidiaries and operates 471 mines in 21 coal fields
across eight states in India.
India Nonferrous Metals & Mining
Industry View: Attractive
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Limited
More Positive News Flow in
the Offing; Stay Overweight
What's Changed
Price Target Rs387.00 to Rs425.00
F11-F13 EPS Increased 5-6%
The Street may be positively surprised by Coal India
on announced price increases and production-related
news flow: Although the stock has outperformed the
Sensex by ~25% YTD, we expect further upside and are
raising our PT to Rs425, which implies potential upside
of 19% from current levels..
In our view, with the exception of the Street, every
stakeholder firmly believes in CIL’s ability to raise
coal prices. We expect CIL’s average price to increase
by 17% in F2012 and 10% in F2013. Our stance is been
buttressed by CIL’s price hike (of about 12.9%) in late
February 2011. More important, CIL appears to be
successfully setting a rational and acceptable modality
for its future price increases.
Why raise prices? 1) To beat cost inflation due to wage
hikes likely to come by July 2011, and other higher costs.
We model an average price hike of 9% from January 9,
2011. 2) Compensation for production loss – a new and
seemingly potent argument from CIL. 3) Save the
regulated part of the power industry, CIL believes all
consumers should pay import parity price. While this is
not new, we find CIL’s focus on this is encouraging.
Modality of price increases: While price hikes for
e-auction and A and B grades are being pursued more
aggressively, CIL will also look to pass through a further
price hike for the non-power sector even though it will
likely raise prices for power sector in F2H12.
The likely bottoming out of pessimism on
production growth (as news flow on regulatory hurdles
improves) should aid valuation multiple expansion:
EV/EBITDA of 7.7x on F2012E indicates healthy upside
to us given our EBITDA CAGR of 32% in F2011-13E.
Investment Thesis
appreciate CIL’s ability to continue its
price advancement. As well,
abatement of regulatory hurdles to
volume growth should expand the
earnings multiple. Accordingly, we
find the stock attractive at EV/EBITDA
of 7.7x based on F2012e.
• Accelerating earnings growth: We
expect EBITDA CAGR of 32% in
F2011-13, with high visibility aided
primarily by pricing growth.
• Attractive vehicle for participating in
India’s economic growth story.
• Robust long-term positives: large
mine reserves, favorable geological
characteristics , and low production
costs
Key Value Drivers
• Higher international coal prices:
We estimate the notified price will
increase by 15% in F2012 and 9% in
F2013
• Change in product mix: We expect
the share of market-linked sales
volume to rise to 37% in F2013 from
22% in F2010.
• Increase in wage costs: We assume
a rise from Rs386/ton in F2010 to
Rs488/t in F2012.
• Production growth: We forecast
5.5% CAGR in F2011-13.
• Regulatory environment
Potential Catalysts
• We expect an increase in notified
prices in F2Q12 to accompany wage
revisions.
• Positive earnings surprise in 1H12.
Downside Risks
• The government does not allow CIL to
raise prices in the next two to three
years because of inflation concerns.
• CIL undertakes a large and
value-reducing acquisition abroad.
Investment Case
We are raising our PT for CIL to Rs425 from Rs387, indicating
an upside of 19% from current levels. We expect CIL to show
consistent EBITDA CAGR approaching 32% in F2011-13,
which would yield potential upside to an EV/EBITDA multiple of
7.7x on our F2012 estimates.
Apart from our positive stance on price increases (on notified
price increase, change in sales mix, and strong global coal
prices), we are becoming increasingly positive on CIL
emerging as a high dividend yield company by F2013, given its
large cash pile, low specific capex requirements, and the low
probability (in our view) of its making some big ticket
acquisition.
Apart from the revisions to our assumptions detailed in Exhibits
1 and 2, we have made the following changes to our model:
1. Increased the tax rate from 33% in each year to 36%
in F2011, 35% in F2012, and 34% in F2012. This is to
bring our expectations in line with the tax rate in first
nine months of F2011.
2. We now adjust the sales item “coal issued for other
purposes“ against the cost item “internal consumption
of coal “ (starting with F2H12) as the company has
done and since we feel it to be logical. A large part of
reduction in our net revenue forecast for F2011 is due
to this reason, although the change does not affect
the profitability. For F2012 and F2013, had it not been
for this adjustment, our net revenue forecasts would
have been higher versus our earlier model.
3. Having witnessed solid cost control from CIL in the
first nine months (and even in F3Q11 when the
overburden removal was not that low), we have
lowered our production cost forecasts.
Streets Focus Shifting from Volume to
Pricing Growth
Pricing trends can drive positive surprise: On
February 28, CIL raised prices on about 42% of its total off-take,
translating into an average 12.9% price growth. This price
increase was remarkable in the sense that regulated power
plants that are not consumers of coal from Mahanadi Coalfields
Ltd (MCL, which is amongst the largest 100%-owned
subsidiaries of CIL) were not affected. Also remarkable was the
lack of controversy with which the 15% price hike for MCL’s
power sector consumers was absorbed. This reinforces our
view that as long as CIL is pragmatic about its pricing strategy
and is not looking to squeeze its customers, it will not face
opposition to its planned price increases.
An increase in the cost of mining and higher international
prices since the last revision (October 2009) were the primary
factors behind the price hike. The Street was surprised by both
the differentiated nature of the price hike and the timing since
CIL had never taken such steps at such a time before. This
event also allayed some Street concerns that the government
was averse to allowing CIL to implement price increases owing
to inflationary concerns.
Interestingly, our interactions with investors suggest that a
number of them are not expecting a further price hike in F2012,
even post wage increases. Many investors are still of the view
that the February price hike was taken in anticipation of wage
negotiations and so after the new wages are implemented, CIL
may not need to raise prices again. We believe, however, that
there could be a positive surprise here, possibly in early F2H12,
as the higher salaries are due to go into effect on July 1, 2011
(still being negotiated with the unions). Moreover, we expect
CIL to raise coal prices for the regulated power sector at this
point as well, although likely by a relatively small amount.
Although we believe that the average price increase will be
sufficient to counter the entire 35% wage bill increase, we are
including only a partial offset, assuming a 9% average price
increase versus the 12% required to counter the full wage
increase.
We expect prices to increase 9% effective September 2011
due to the following:
1. Wage revisions effective July 1, 2011: We expect
CIL’s salary per head to increase by 35% p.a., leading
to a 26% (adjusted for only three quarters in F2012)
rise in employee cost for F2012 and 9% for F2013. To
put this in context, the wage increase is to be
implemented only for non-executive employees
(about 90% of total employee base), and we assume
that wage negotiations will result in a 39% increase for
non-executive employees. We feel that chances of
this being overshot are quite low.
2. Environmental issues curtailed volume growth by
almost 18mt in F2011: CIL should compensate for this
loss of production by increasing prices further. We no
to expect the government to oppose this move,
especially given the low price hike that CIL may
implement for power sector.
3. CIL’s price increase in F2H12 will again focus on
industries ex-regulated power: Since these
consumers sell their products (cement, steel, DRI,
coke or merchant power) in unregulated markets, the
opposition to such increases may not be high,
especially given the low base for CIL’s coal price
currently. In addition, many of these consumers
import their coal at substantially higher prices and
they may not mind much another 12-15% price hike if
they are assured of supplies from CIL. Even post a
price increase, we believe CIL’s coal will be slightly
cheaper than import parity prices.
4. Domestic and global shortage could aid CIL’s
average realizations since this is pushing up CIL’s
e-auction and A and B grade coal: The recent
earthquake in Japan and the related issues with its
nuclear power plants have led other nuclear powerdependent
countries such as Germany to implement
maintenance shut downs at their nuclear facilities.
This is expected to exacerbate the tightness in
thermal coal markets. We expect import-dependent
thermal coal buyers to purchase more from CIL’s
e-auction facility and be more willing to pay higher
prices, thus aiding CIL’s realizations. E-auction price
premium over notified prices was 81% in the first nine
months of F2011 and 93% in December 2010
compared to 56% in F2010. We expect e-auction
realizations to increase 24.3% YoY in F2012 and
expect the e-auction proportion to rise to 13.5% in
F2012 (11% in F2010.)
Volume Growth-related Pessimism Seems
to Be Bottoming Out
Although we maintain our stance that CIL is more of a play on
price increase rather than on production growth, in the medium
term we acknowledge that in late C2010, poor news flow on
volume growth compressed the stock’s valuations multiples.
Now that regulatory hurdles seem to be easing, volume
expectations should start inching up, and, accordingly, we
expect some improvement in valuations of the stock
We maintain our production estimates of 454mt in F2012 and
481mt in F2013 primarily due to:
• Regulatory hurdles relating to “No-go” areas and CEPI
categorization impeded production growth for CIL by
almost 18mt in F2011. However, in recent months, we
have seen the regulatory stance softening, leading to the
approvals and clearances of several projects.
Environment approval was recently granted to nine new
projects, and there is progress on approval of seven other
projects.
• Logistical bottlenecks caused mainly by unavailability of
railway rakes are reducing, at least in the near term.
Currently, 185 rakes (one rake typically has 58 freight rail
wagons) per day are being made available to CIL for coal
lifting compared to 175 in F1H11 and 168 in F2010.
Valuation
We are raising our price target to Rs425 from Rs387, implying
an upside of 19% from current levels and target F2012
multiples of 13.9 P/E and 7.7 EV/EBITDA. Our higher price
target primarily reflects the increase in our EBITDA forecasts of
13% in F2012, 10% in F2013, 11% in F2014, and 12% in
F2015.
To set our price target, we use a two-phase DCF model with an
explicit phase of five years and a terminal growth rate of 3%.
We assume an average realization of Rs1348/ton for F2012,
with a CAGR of 9% for the explicit phase and production of
454mt for F2012 with a CAGR of 6.7% for the explicit phase.
We derive a WACC of 13.0% for the company with a risk-free
rate of 7.9% (10-year government bond yield) and a
market-risk premium of 6.5%, in line with the recommendations
of our regional strategy team.
Downside Risks to Price Target
Risks to our price target include slower-than-expected price
increase, a sudden dip in industrial and economic activity in
India and globally, and an unfavorable regulatory environment.
Exhibit 6
WACC Calculation
WACC Calculation:
Risk Free Return (Rf) (%) 7.9
Market Premium (Rm-Rf) (%) 6.5
Assumed Beta 1.06
Cost of Equity (Re) (%) 14.8
Equity (%) 80
Cost of Debt (Rd) (%) 9.0
Tax rate (%) 33.8
After-tax cost of debt (Rd [1-t]) (%) 6.0
Debt (%) 20
WACC (%) 13.0
Source: Company data, Morgan Stanley Research
Exhibit 7
Beta Calculations
Typical Indian mining company beta (A) 1.17
Weighting of mining companies 0.75
NTPC's beta (B) 0.73
Weighting of NTPC beta 0.25
Weighted Average of A and B 1.06
Source: Company data, Morgan Stanley Research
Exhibit 8
DCF – Price Target of Rs425
Present value (as of 1 Dec, 2011) of the explicit phase (A) 905,981
Terminal growth rate (%) 3
Terminal value 2,313,356
Present value (as on 1st Dec 2011, of terminal value ( B) 1,360,952
Total present value (as on 1st Dec,2011 ) =( A+B) 2,266,933
Net debt as on F11 end (416,551)
Equity value (Rs m) 2,683,484
No of shares 6,316
Implied Equity value per share 425
Source: Company data, Morgan Stanley Research
Company Description
Coal India Limited is the largest coal producer in the world with
production of 431mt as of FY10. The company has the largest
reserve base in the world of around 19bt as per JORC
standards. Primarily an open-cast operator, the company has
nine subsidiaries and operates 471 mines in 21 coal fields
across eight states in India.
India Nonferrous Metals & Mining
Industry View: Attractive
No comments:
Post a Comment