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Coal India
Underweight
COAL.BO, COAL IN
High level meeting called by PM underscores severity
of coal shortage; Potential clarity on multiple
regulatory issues
• High level meeting called on Coal as supply situation remains weak : As per
media reports (BS, DNA), the Prime Minister has called a high level meeting of
the ministers of Power, Coal, Environment, Finance and the Planning
Commission, Deputy Chairman, on May 16th to discuss the coal situation in the
country. The recent miss in coal production and subsequent reduction in
production targets, in our view has aggravated the coal situation (at a time when
global thermal coal prices are sharply higher). Recent media reports (ET) have
highlighted a 1000MW TPP of Damodar Valley lying idle given the coal
shortage. The Prime Minister getting involved and calling a meeting, indicates
the severity of the coal deficit situation. As per media report (BL) the Central
Electrical Authority (CEA) has asked that future boilers be designed to accept
30% imported coal, from the current design of 10-15% imported coal. We
continue to see upside risk to our total thermal coal import numbers of
72/90MT in FY12/13E respectively.
• What are the key issues impacting domestic coal supplies: Coal India
(COAL) which accounts for 80% of India’s coal production, has seen both
production and off-take remain mostly flat. COAL has attributed the production
impact to Environment related issues (CEPI) and off-take on lack of railway
rakes. More importantly many of COAL’s projects have also not yet got the
necessary Environment clearances, putting a question mark on the +6% yearly
growth. Recently a high level EGOM has been meeting regularly to discuss the
GO-NO area. We believe the high level meeting is likely to address the above
issues to increase domestic supplies. J.P. Morgan Utility analyst Shilpa Krishnan
indicates total power capacity addition of 14GW in FY12E and 18GW in
FY13E.
• Potential positives and negatives for Coal India: Any easing of environmental
regulations would be positive for COAL as it would provide credibility on +6%
yearly production growth plans, while higher rake availability would allow
COAL to liquidate part of inventory (nearly 70MT) in FY12E (not part of our
estimates). We believe negatives for COAL could possibly emerge if COAL is
asked to lower e-auction coal sales to cater more to the power segment in the
near term, which is right now facing a crunch (power FSA for FY12E are at
329MT v/s 309MT in FY11E, while e-auction coal sales volumes are at 10-12%
of production volumes). The above is not part of our base case and we believe
this is a very low probability event in our view.
• Imported coal- Coal India’s tenders: Coal India has floated tenders for long
term (10 year) import volumes. We believe the implementation of this would not
be easy, given that back to back contracts would be required with power utilities
to make sure COAL does not carry price risk on the imported coal. More
importantly, given that imported coal is significantly more expensive than
domestic coal and merchant tariffs have been under pressure, COAL also needs
to reduce credit risk from its customers of imported coal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India
Underweight
COAL.BO, COAL IN
High level meeting called by PM underscores severity
of coal shortage; Potential clarity on multiple
regulatory issues
• High level meeting called on Coal as supply situation remains weak : As per
media reports (BS, DNA), the Prime Minister has called a high level meeting of
the ministers of Power, Coal, Environment, Finance and the Planning
Commission, Deputy Chairman, on May 16th to discuss the coal situation in the
country. The recent miss in coal production and subsequent reduction in
production targets, in our view has aggravated the coal situation (at a time when
global thermal coal prices are sharply higher). Recent media reports (ET) have
highlighted a 1000MW TPP of Damodar Valley lying idle given the coal
shortage. The Prime Minister getting involved and calling a meeting, indicates
the severity of the coal deficit situation. As per media report (BL) the Central
Electrical Authority (CEA) has asked that future boilers be designed to accept
30% imported coal, from the current design of 10-15% imported coal. We
continue to see upside risk to our total thermal coal import numbers of
72/90MT in FY12/13E respectively.
• What are the key issues impacting domestic coal supplies: Coal India
(COAL) which accounts for 80% of India’s coal production, has seen both
production and off-take remain mostly flat. COAL has attributed the production
impact to Environment related issues (CEPI) and off-take on lack of railway
rakes. More importantly many of COAL’s projects have also not yet got the
necessary Environment clearances, putting a question mark on the +6% yearly
growth. Recently a high level EGOM has been meeting regularly to discuss the
GO-NO area. We believe the high level meeting is likely to address the above
issues to increase domestic supplies. J.P. Morgan Utility analyst Shilpa Krishnan
indicates total power capacity addition of 14GW in FY12E and 18GW in
FY13E.
• Potential positives and negatives for Coal India: Any easing of environmental
regulations would be positive for COAL as it would provide credibility on +6%
yearly production growth plans, while higher rake availability would allow
COAL to liquidate part of inventory (nearly 70MT) in FY12E (not part of our
estimates). We believe negatives for COAL could possibly emerge if COAL is
asked to lower e-auction coal sales to cater more to the power segment in the
near term, which is right now facing a crunch (power FSA for FY12E are at
329MT v/s 309MT in FY11E, while e-auction coal sales volumes are at 10-12%
of production volumes). The above is not part of our base case and we believe
this is a very low probability event in our view.
• Imported coal- Coal India’s tenders: Coal India has floated tenders for long
term (10 year) import volumes. We believe the implementation of this would not
be easy, given that back to back contracts would be required with power utilities
to make sure COAL does not carry price risk on the imported coal. More
importantly, given that imported coal is significantly more expensive than
domestic coal and merchant tariffs have been under pressure, COAL also needs
to reduce credit risk from its customers of imported coal.
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