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Coal India
Underweight
COAL.BO, COAL IN
Recent "Noise" indicates potential emergence of
Policy Uncertainity
Recent ‘Noise’ On E-auction sales is not the real issue in our view: Over the
past few days, various media reports (Business Standard, BL) have carried news
items on COAL INDIA potentially being asked to stop e-auction coal sales and
instead supply to the power sector. We had highlighted this possibility of this in
our recent note (High level meeting called by PM underscores severity of coal
shortage; Potential clarity on multiple regulatory issues’ dated 13th May,
2011). E auction coal sales account for only 10-12% of volumes, but are a much
higher share of profitability (20-30% of EBITDA in our view). However we
believe the real issue over here is that the recent NOISE has highlighted the
risk emerging from ‘POLICY UNCERTAINTY’ as the coal situation
deteriorates in India with mismatch between demand and supply.
• Where does the potential policy uncertainty come from: Essentially there are
3 areas in which we see potential uncertainty for COAL- a) Does the increase
in supply to the power sector happen at the cost of some reduction in eauction
coal sales; b) Will COAL take on the role of being the importer
with prices being pooled and c) Coal price increases as and when the wage
bill gets finalized. We also see the possibility of commercial coal sales being
gradually allowed, though not in the very near term.
• Recent Planning Commission presentation ask for COAL to become a coal
supplier: Planning Commission in the key issues for the 12th Plan has
highlighted that even on optimistic assumption about COAL production, India
would need to import 250MT by FY18E. Interestingly the Commission has
called for COAL to evolve into a coal supplier and should plan on importing
coal and blending domestic and imported coal for supplies.
• Current high level focus could see faster clearances, volumes, inventory
liquidation, but could come with a ‘FEW GIVES’ as well as for COAL:
Among the GIVES, the most probable one in our view, would be COAL
absorbing most of the proposed wage hike (we estimate FY12E impact Rs40bn)
from the recent coal price increase done in Feb and only doing a marginal price
hike. We believe clarity on this could potentially emerge as early as next week
when COAL reports. We DO NOT dispute the structural story of COAL, but
believe current valuations are excessive and risk reward even after recent
7% correction is not in favor of investors with a medium term horizon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India
Underweight
COAL.BO, COAL IN
Recent "Noise" indicates potential emergence of
Policy Uncertainity
Recent ‘Noise’ On E-auction sales is not the real issue in our view: Over the
past few days, various media reports (Business Standard, BL) have carried news
items on COAL INDIA potentially being asked to stop e-auction coal sales and
instead supply to the power sector. We had highlighted this possibility of this in
our recent note (High level meeting called by PM underscores severity of coal
shortage; Potential clarity on multiple regulatory issues’ dated 13th May,
2011). E auction coal sales account for only 10-12% of volumes, but are a much
higher share of profitability (20-30% of EBITDA in our view). However we
believe the real issue over here is that the recent NOISE has highlighted the
risk emerging from ‘POLICY UNCERTAINTY’ as the coal situation
deteriorates in India with mismatch between demand and supply.
• Where does the potential policy uncertainty come from: Essentially there are
3 areas in which we see potential uncertainty for COAL- a) Does the increase
in supply to the power sector happen at the cost of some reduction in eauction
coal sales; b) Will COAL take on the role of being the importer
with prices being pooled and c) Coal price increases as and when the wage
bill gets finalized. We also see the possibility of commercial coal sales being
gradually allowed, though not in the very near term.
• Recent Planning Commission presentation ask for COAL to become a coal
supplier: Planning Commission in the key issues for the 12th Plan has
highlighted that even on optimistic assumption about COAL production, India
would need to import 250MT by FY18E. Interestingly the Commission has
called for COAL to evolve into a coal supplier and should plan on importing
coal and blending domestic and imported coal for supplies.
• Current high level focus could see faster clearances, volumes, inventory
liquidation, but could come with a ‘FEW GIVES’ as well as for COAL:
Among the GIVES, the most probable one in our view, would be COAL
absorbing most of the proposed wage hike (we estimate FY12E impact Rs40bn)
from the recent coal price increase done in Feb and only doing a marginal price
hike. We believe clarity on this could potentially emerge as early as next week
when COAL reports. We DO NOT dispute the structural story of COAL, but
believe current valuations are excessive and risk reward even after recent
7% correction is not in favor of investors with a medium term horizon.
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