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Recent news reports suggest the Ministry of Power is asking that more coal be allocated to power
production at the cost of e-auction volume. We consider the cessation of e-auction unlikely, but
given the precarious financial health of State Electricity Boards, cash flow could be severely
hampered. Maintain SELL.
E-auction coal unlikely to be transferred to power sector
The e-auction process was initiated under the Coal Distribution Policy, 2007, to: 1) discover
market pricing for coal; 2) allow fringe buyers who could not otherwise get access to linkage coal
to get coal; and 3) increase the proportion of coal sold through e-auction over time. However, this
is subject to the caveat that the needs of the power sector are first met and that only residual coal
is sold to the market. Power sector coal demand has risen as India’s power generation capacity
has been growing at a much faster rate than coal production. Coal India has a historic
commitment to the power sector, and has set a target of producing 452mt in FY12, with 352mt
allocated to the power sector (vs 302mt in FY11).
We consider the financial health of SEBs a larger concern
State Electricity Boards (SEB), which produce 55% of India’s electricity, are in precarious
financial health. In FY09, SEBs cumulatively posted losses in excess of Rs500bn, including cash
losses in excess of Rs213bn. In the same year, SEBs has an aggregate net worth of Rs297bn vs
debt of Rs2.8tn – of 84 utilities, 32 had negative net worth and 18 had debt levels more than 3.5x
their net worth.
Premium valuations: maintain Sell
Investor perception of Coal India has seen a massive shift since the February 27 price hike – in
our view, the ability to raise prices amid inflation and volume concerns was well received.
However, we note that the company trades at 10.9x FY12F EBITDA and 19.4x PE, making it the
most expensive coal company in the world. In addition, we believe that the precarious financial
position of Coal India’s core customers could result in payment delays that could impact its cash
flows. During 1HFY11, despite strong profitability, the company managed to generate free cash of
just US$141m. Maintain Sell.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recent news reports suggest the Ministry of Power is asking that more coal be allocated to power
production at the cost of e-auction volume. We consider the cessation of e-auction unlikely, but
given the precarious financial health of State Electricity Boards, cash flow could be severely
hampered. Maintain SELL.
E-auction coal unlikely to be transferred to power sector
The e-auction process was initiated under the Coal Distribution Policy, 2007, to: 1) discover
market pricing for coal; 2) allow fringe buyers who could not otherwise get access to linkage coal
to get coal; and 3) increase the proportion of coal sold through e-auction over time. However, this
is subject to the caveat that the needs of the power sector are first met and that only residual coal
is sold to the market. Power sector coal demand has risen as India’s power generation capacity
has been growing at a much faster rate than coal production. Coal India has a historic
commitment to the power sector, and has set a target of producing 452mt in FY12, with 352mt
allocated to the power sector (vs 302mt in FY11).
We consider the financial health of SEBs a larger concern
State Electricity Boards (SEB), which produce 55% of India’s electricity, are in precarious
financial health. In FY09, SEBs cumulatively posted losses in excess of Rs500bn, including cash
losses in excess of Rs213bn. In the same year, SEBs has an aggregate net worth of Rs297bn vs
debt of Rs2.8tn – of 84 utilities, 32 had negative net worth and 18 had debt levels more than 3.5x
their net worth.
Premium valuations: maintain Sell
Investor perception of Coal India has seen a massive shift since the February 27 price hike – in
our view, the ability to raise prices amid inflation and volume concerns was well received.
However, we note that the company trades at 10.9x FY12F EBITDA and 19.4x PE, making it the
most expensive coal company in the world. In addition, we believe that the precarious financial
position of Coal India’s core customers could result in payment delays that could impact its cash
flows. During 1HFY11, despite strong profitability, the company managed to generate free cash of
just US$141m. Maintain Sell.
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