Coal India -Better than expected prices, but potential headwinds persist ::Standard Chartered Research,

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Coal India
Better than expected prices, but potential headwinds persist


 We trim our EPS forecast by 3% for FY11 but increase
FY12E EPS by 7% to reflect the increased exposure to
spot prices under the new pricing mechanism.
 We expect another round of price increases in Q2 FY12
to accommodate imminent wage revisions and the
proposed mining bill, but only time will tell whether this
increase will encompass sales to power companies,

given the inflation concerns in India.
 We increase our DCF-based price target to Rs.370
(from Rs.338 set on 8 Dec 2010) to reflect the
company’s increased exposure to the spot market
(through Grades A & B coal) and FY rollover



Production downgrades offset by new pricing
mechanism: Coal India reported flat production of 431mt for
FY11, down 6.5% from its target driven by project delays
and infrastructure constraints. However, it raised selling
prices to selective customers in Q4 FY11 to offset lower
production. The new pricing mechanism would offer more
exposure to the spot coal market as we expect spot-based
sales volumes to rise to 23% in FY12 from 16% in FY11.
Potential headwinds still an overhang: The form and
substance of the new mining bill are vague at best. New
chairman NC Jha recently announced that there could be
another round of price increases in August 2011 to offset
potential cost increases from imminent wage revisions and
the proposed mining bill. Given the inflationary pressures in
India, we think the company will likely absorb at least some
of these cost increases.
Coal imports to bridge domestic supply-demand gap:
Environmental clearance continues to hamper Coal India’s
growth plans as the company expects a 450 million tonne
shortfall in its supply commitment to customers under LoA
during the next 10 years. It intends to import coal to bridge
the supply-demand gap and has invited bids from 16 coal
exporters. With its strong balance sheet, we think Coal
India could be rather more aggressive in M&A overseas to
secure supply.
Premium to peers to further narrow: It is trading at 16.8x
FY12E earnings, which implies an average 22% premium
to its Indonesian peers and a 45% premium to its Chinese
peers. Since Nov 2010, Coal India has underperformed its
Indonesian peers by 17% and its Chinese peers by 5%.
Going forward, we expect its premium to peers to narrow
further, due to the lack of visibility on its growth and the fact
that it is trying to navigate through upcoming wage
revisions and the proposed new mining bill.