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Coal India
▼ Underweight
Previous: Neutral
COAL.BO, COAL IN
Downgrading to UW- Recent sharp run up building in
large price increase and volume delivery, where there
could be disappointment
• Downgrading to UW, recommend switch to TATA: We downgrade COAL to
UW from Neutral previously. We maintain our PT (Rs325) and earnings
estimates (+5% over consensus for FY12E). In our view near term catalysts of
differential coal price increases and easing of environmental concerns have
played out and believe that the stock's recent +25% up-move since end Feb-
11 is building in further large price increases and acheiving of off-take
target for FY12E, both of which in our view are likely to be difficult.
• March/June seasonally strong quarters: While March-May-11E off take
volume is likely to be strong, we believe this is a seasonal phenomenon as
railway rake availability increases, but for the full year FY12E the off take
target of 454MT (JPMe 451MT) is predicated on +13.5% increases in coal
transportation by rail, compared to 2% over last 3 years, which is difficult.
• Will there be another large price increase in June/July on the back of wage
provisions: Our conversations with investors point to the expectation of another
price increase in June/July as COAL starts to provide for wage provision.
While we view the recent differential coal price hike implemented as a
structural positive for COAL, the sheer size (30% for non regulated
sectors, Grade A, B at 105-218%) of the recent coal price increase makes
another large price increase for the non regulated sector difficult in our
view. E-auction volumes in our view are likely capped at current levels for
FY12E, given that meeting FSA for power sector (329MT in FY12E v/s
305MT in FY11E) even at 90% means additional 17MT of supply to power
sector. Admittedly even after the recent coal price increase, COAL's prices are
at a discount (though for non power sector it has sharply come down), however
given the near monopoly status (and lack of material ramp up in captive coal
production), in our view means that further price increases could be more
tempered for the non regulated sectors (cement, aluminum., steel)
• Structural long term story intact, but near term valuations leave little room
for any disappointment: We do not dispute the long term story of COAL given
India’s coal shortage. However, at ~17x FY12E/P/E (even ahead of NTPC, the
state utility) and high expectations, in our view little room for disappointment
either on the coal price or volume front.
Sharp up-move in stock price leaves little room for
disappointment
We downgrade COAL to UW from Neutral previously. We maintain our PT of
Rs325 (implying 11% downside from current levels) and our earnings estimates
for FY12-13E. After the initial listing day gains, COAL grinded down lower on:
a) Disappointment on volume as environmental issues (mainly CEPI) impacted
production.
b) Cost pressures (mainly wages) moved higher given the overall inflation in
the economy.
Then in late February, COAL implemented coal price hikes, which was mainly
targeted at the non regulated sector (aluminum, steel, cement) and since then the
stock has moved up 25%. Environment related issues also seemed to ease (CEPI
relaxation came through for Angul-Talcher area, though Ib-Valley still remains under
CEPI related restriction).
We believe the recent stock price up-move is building in:
a) Further LARGE coal price hikes, possibly near June/July as wage
provision begins
b) COAL meeting its off-take target for FY12E.
While we have built in coal price increases for FY12E, we believe hikes over and
above wage provisions in the near term are likely to be difficult. For the non
regulated sector the price increases in some grades have been very steep (+100%),
while for other non regulated sector like aluminum and cement, the price increase of
30% is a sharp cost increase and another large price increase in 3 months looks
difficult. We expect a general price increase across all grades of coal to essentially
off-set the wage provisions likely to be made in July. In our view, the coal price
hike may not happen in July, if the company were to differ providing for wage
provisions in July, given that final wage finalization could take some time
(COAL could choose to provide the entire provision once the % increase is
known and do an ad-hoc coal price revision, like it did the previous time).
COAL has officially maintained that they would be providing for the wage
provisions starting from July itself.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India
▼ Underweight
Previous: Neutral
COAL.BO, COAL IN
Downgrading to UW- Recent sharp run up building in
large price increase and volume delivery, where there
could be disappointment
• Downgrading to UW, recommend switch to TATA: We downgrade COAL to
UW from Neutral previously. We maintain our PT (Rs325) and earnings
estimates (+5% over consensus for FY12E). In our view near term catalysts of
differential coal price increases and easing of environmental concerns have
played out and believe that the stock's recent +25% up-move since end Feb-
11 is building in further large price increases and acheiving of off-take
target for FY12E, both of which in our view are likely to be difficult.
• March/June seasonally strong quarters: While March-May-11E off take
volume is likely to be strong, we believe this is a seasonal phenomenon as
railway rake availability increases, but for the full year FY12E the off take
target of 454MT (JPMe 451MT) is predicated on +13.5% increases in coal
transportation by rail, compared to 2% over last 3 years, which is difficult.
• Will there be another large price increase in June/July on the back of wage
provisions: Our conversations with investors point to the expectation of another
price increase in June/July as COAL starts to provide for wage provision.
While we view the recent differential coal price hike implemented as a
structural positive for COAL, the sheer size (30% for non regulated
sectors, Grade A, B at 105-218%) of the recent coal price increase makes
another large price increase for the non regulated sector difficult in our
view. E-auction volumes in our view are likely capped at current levels for
FY12E, given that meeting FSA for power sector (329MT in FY12E v/s
305MT in FY11E) even at 90% means additional 17MT of supply to power
sector. Admittedly even after the recent coal price increase, COAL's prices are
at a discount (though for non power sector it has sharply come down), however
given the near monopoly status (and lack of material ramp up in captive coal
production), in our view means that further price increases could be more
tempered for the non regulated sectors (cement, aluminum., steel)
• Structural long term story intact, but near term valuations leave little room
for any disappointment: We do not dispute the long term story of COAL given
India’s coal shortage. However, at ~17x FY12E/P/E (even ahead of NTPC, the
state utility) and high expectations, in our view little room for disappointment
either on the coal price or volume front.
Sharp up-move in stock price leaves little room for
disappointment
We downgrade COAL to UW from Neutral previously. We maintain our PT of
Rs325 (implying 11% downside from current levels) and our earnings estimates
for FY12-13E. After the initial listing day gains, COAL grinded down lower on:
a) Disappointment on volume as environmental issues (mainly CEPI) impacted
production.
b) Cost pressures (mainly wages) moved higher given the overall inflation in
the economy.
Then in late February, COAL implemented coal price hikes, which was mainly
targeted at the non regulated sector (aluminum, steel, cement) and since then the
stock has moved up 25%. Environment related issues also seemed to ease (CEPI
relaxation came through for Angul-Talcher area, though Ib-Valley still remains under
CEPI related restriction).
We believe the recent stock price up-move is building in:
a) Further LARGE coal price hikes, possibly near June/July as wage
provision begins
b) COAL meeting its off-take target for FY12E.
While we have built in coal price increases for FY12E, we believe hikes over and
above wage provisions in the near term are likely to be difficult. For the non
regulated sector the price increases in some grades have been very steep (+100%),
while for other non regulated sector like aluminum and cement, the price increase of
30% is a sharp cost increase and another large price increase in 3 months looks
difficult. We expect a general price increase across all grades of coal to essentially
off-set the wage provisions likely to be made in July. In our view, the coal price
hike may not happen in July, if the company were to differ providing for wage
provisions in July, given that final wage finalization could take some time
(COAL could choose to provide the entire provision once the % increase is
known and do an ad-hoc coal price revision, like it did the previous time).
COAL has officially maintained that they would be providing for the wage
provisions starting from July itself.
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