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Coal India
New path, but no more hikes in FY12
Event
Non core sector to subsidise core sector? Lots of investor interest has
been generated due to the recent price hike, and there is speculation about a
further increase to the base rate. We believe that the core sector, which
accounts for 70% of Coal India’s production, may not see any major increase
as the government battles rising losses at SEBs. The higher increase allowed
for the non core sector was possibly a compensation for the same issue.
We have raised our earnings estimates because of this and have increased
our TP to Rs370 from Rs340. However, we maintain a Neutral
recommendation and would be more positive only on dips.
Impact
Non core - not much left to increase: Of the 30% volume sold as non core,
19-20% is now virtually at the market price and only 10-11% of quantity is left
at the subsidised price. Even if Coal India were to bring this on par with the
market price, the impact on its average realisation would likely not rise by
more than 6%.
Core sector – rising SEB losses a big challenge: 70% of CIL’s production
goes to the power sector, where the main buyers are State Electricity Boards
(SEBs). The cumulative losses for SEBs are now US$15bn and are expected
to grow to US$19bn in two years and may limit coal cost increases.
Wage cost pressures to accelerate: Coal India’s profitability has increased
by 81% since FY07. This, along with high inflation, means that labour unions
can bargain for more than a 25% raise and that settlement can be prolonged.
Currently, wages are 50% of the cost, and every 10% increase could mean an
11% decline in profits.
CIL management guidance not exciting: We have reduced our production
estimates in line with the company’s recent guidance. As CIL has guided that
it will increase prices to compensate for any cost increase, we and the Street
are building-in a sharp improvement in margins. We assume a 5% CAGR in
coal prices and think that, for every change of 1% less, NPV is almost
Rs55/sh lower.
Earnings and target price revision
We are raising our estimates by 2%, 18% and 10% for FY11, FY12 and FY13,
respectively.
Price catalyst
12-month price target: Rs370.00 based on a DCF methodology.
Catalyst: Increase in despatches and further price increase.
Action and recommendation
Maintain Neutral: We think Coal India has significant potential but is caught
in an Indian subsidy tangle that will take time to unlock. It is trading at a 50%
premium to the global average, which we believe is justified due to its
defensive nature, although it doesn’t leave much room for comfort. We
increased our target price to Rs370, but maintain our Neutral recommendation
and recommend accumulating on declines
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India
New path, but no more hikes in FY12
Event
Non core sector to subsidise core sector? Lots of investor interest has
been generated due to the recent price hike, and there is speculation about a
further increase to the base rate. We believe that the core sector, which
accounts for 70% of Coal India’s production, may not see any major increase
as the government battles rising losses at SEBs. The higher increase allowed
for the non core sector was possibly a compensation for the same issue.
We have raised our earnings estimates because of this and have increased
our TP to Rs370 from Rs340. However, we maintain a Neutral
recommendation and would be more positive only on dips.
Non core - not much left to increase: Of the 30% volume sold as non core,
19-20% is now virtually at the market price and only 10-11% of quantity is left
at the subsidised price. Even if Coal India were to bring this on par with the
market price, the impact on its average realisation would likely not rise by
more than 6%.
Core sector – rising SEB losses a big challenge: 70% of CIL’s production
goes to the power sector, where the main buyers are State Electricity Boards
(SEBs). The cumulative losses for SEBs are now US$15bn and are expected
to grow to US$19bn in two years and may limit coal cost increases.
Wage cost pressures to accelerate: Coal India’s profitability has increased
by 81% since FY07. This, along with high inflation, means that labour unions
can bargain for more than a 25% raise and that settlement can be prolonged.
Currently, wages are 50% of the cost, and every 10% increase could mean an
11% decline in profits.
CIL management guidance not exciting: We have reduced our production
estimates in line with the company’s recent guidance. As CIL has guided that
it will increase prices to compensate for any cost increase, we and the Street
are building-in a sharp improvement in margins. We assume a 5% CAGR in
coal prices and think that, for every change of 1% less, NPV is almost
Rs55/sh lower.
Earnings and target price revision
We are raising our estimates by 2%, 18% and 10% for FY11, FY12 and FY13,
respectively.
Price catalyst
12-month price target: Rs370.00 based on a DCF methodology.
Catalyst: Increase in despatches and further price increase.
Action and recommendation
Maintain Neutral: We think Coal India has significant potential but is caught
in an Indian subsidy tangle that will take time to unlock. It is trading at a 50%
premium to the global average, which we believe is justified due to its
defensive nature, although it doesn’t leave much room for comfort. We
increased our target price to Rs370, but maintain our Neutral recommendation
and recommend accumulating on declines
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