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Although as expected, volumes continue to be affected by regulatory and evacuation issues,
the timing and the quantum of the price hike surprised us. We increase our FY12/FY13 EPS
forecasts by 12% and raise TP to Rs290. Maintain Sell
Move to differential pricing positive; focus shifts to wage revision
We believe Coal India’s move to a market-driven pricing regime for non-regulated customers
is positive. Pricing for regulated customers, such as power customers, will continue to be on
a cost-plus basis. Overall, we see an 11% increase in average prices (incremental revenues
of Rs57bn) in FY12 due to the recent (unexpected) coal price hike. Based on our interaction
with management, the hike has been taken due to the fixed cost nature of the business to
offset 1) an FY12 volume shortfall of 30mt (impact of c.Rs33bn) and 2) an 11% rise in
employee expenses for FY11 (Rs20bn) due to higher dearness allowances. The five-yearly
wage revision, which includes a gratuity provision and which would have an additional impact
of Rs60bn on an annualised basis, is due in July. We have factored in another round of price
increases later during the year to absorb the future wage increase. We estimate employee
expenses will increase 25% and 9% for FY12 and FY13. Our commodities team expects
global coal prices to trend downward as supply growth exceeds demand growth through to
FY14. This should affect only c.15% of volumes, which are fully market-driven.
We remain cautious on production and off-take constraints
Regulatory hurdles and a shortage of rakes still constrain volumes. FY11/12 production
targets – initially at 460mt/481mt – have since been gradually cut to 435mt/447mt. Coal India
expects relaxation of CEPI norms, key for its expansion plans, but we believe this is unlikely
to add to volumes over FY12-13. We forecast off-take of 433mt/448mt/468mt for FY11-13.
We raise our earnings forecasts 12% for FY12/13. Maintain Sell on rich valuation
We increase our realisation assumptions, factoring in the price increase. Coal India has a high
sensitivity to pricing due to large fixed costs (3.3% to FY12F earnings for a 1% change in
realisations). Our earnings forecasts rise 12% for FY12/13. The proposed mining act could impact
earnings by 15% (Rs35/shr on valuations). We continue to value Coal India using DCF
(Rs252/shr) with a 15% premium for the price differential that exists between Coal India’s and
international prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Although as expected, volumes continue to be affected by regulatory and evacuation issues,
the timing and the quantum of the price hike surprised us. We increase our FY12/FY13 EPS
forecasts by 12% and raise TP to Rs290. Maintain Sell
Move to differential pricing positive; focus shifts to wage revision
We believe Coal India’s move to a market-driven pricing regime for non-regulated customers
is positive. Pricing for regulated customers, such as power customers, will continue to be on
a cost-plus basis. Overall, we see an 11% increase in average prices (incremental revenues
of Rs57bn) in FY12 due to the recent (unexpected) coal price hike. Based on our interaction
with management, the hike has been taken due to the fixed cost nature of the business to
offset 1) an FY12 volume shortfall of 30mt (impact of c.Rs33bn) and 2) an 11% rise in
employee expenses for FY11 (Rs20bn) due to higher dearness allowances. The five-yearly
wage revision, which includes a gratuity provision and which would have an additional impact
of Rs60bn on an annualised basis, is due in July. We have factored in another round of price
increases later during the year to absorb the future wage increase. We estimate employee
expenses will increase 25% and 9% for FY12 and FY13. Our commodities team expects
global coal prices to trend downward as supply growth exceeds demand growth through to
FY14. This should affect only c.15% of volumes, which are fully market-driven.
We remain cautious on production and off-take constraints
Regulatory hurdles and a shortage of rakes still constrain volumes. FY11/12 production
targets – initially at 460mt/481mt – have since been gradually cut to 435mt/447mt. Coal India
expects relaxation of CEPI norms, key for its expansion plans, but we believe this is unlikely
to add to volumes over FY12-13. We forecast off-take of 433mt/448mt/468mt for FY11-13.
We raise our earnings forecasts 12% for FY12/13. Maintain Sell on rich valuation
We increase our realisation assumptions, factoring in the price increase. Coal India has a high
sensitivity to pricing due to large fixed costs (3.3% to FY12F earnings for a 1% change in
realisations). Our earnings forecasts rise 12% for FY12/13. The proposed mining act could impact
earnings by 15% (Rs35/shr on valuations). We continue to value Coal India using DCF
(Rs252/shr) with a 15% premium for the price differential that exists between Coal India’s and
international prices.
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