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Coal India management
meetings hosted by Morgan
Stanley: F12 - year of offtake
We hosted Coal India Limited’s Director of Finance
for a series of investor meetings in Mumbai: From
the Q&A sessions throughout the day, we broadly
categorize the questions and CIL’s responses into the
following seven categories:
• Price increase to pass on wage inflation: CIL will
strive to maintain EBITDA margins at F11 levels and
will make its pricing decision accordingly. If prices
are not lifted in F12 (we expect this in September
2011), then our F12 PAT could have 4-5%
downside.
• Production targets for F12: 447 Mt (pessimistic
scenario per management) and internal target of
452 Mt. We are at 454 Mt.
• Off-take targets for FY12: 454 Mt based on
availability of 174 railway rakes/day for the current
fiscal year. Could achieve 473 Mt if rake availability
increases to 190/day. We expect 451mt.
• Wage cost increase from July 1, 2011: Wage
negotiations are getting delayed but will start
providing for a 20-25% wage hike from 2QF12. We
expect a 35% increase.
• IFRS impact on OBR reversal: Expect bottom line
to increase by Rs25bn. We already adjust for this.
• E-Auction volumes: Sold 47 Mt under e-auctions
in F11 and expect to sell 55-60 Mt in F12. We
expect 61mt.
• Washed coal: Production of 15 Mt in F11 and
expect an increase of 2 Mt by F13, 30 mt capacity
increase in three years from now
Will CIL pass on the incremental cost in wages to end
consumers?
No decision on further price increases has been made so far.
But the company remains confident that the 12.9% average
price hike taken in Feb 2011 and the volume growth targeted in
FY12 will be more than sufficient to overcome any cost
inflation.
However, if cost inflation places CIL’s current EBITDA margins
of 35% under pressure, then management will consider a
further price hike.
We estimate an average price hike of 9% to be effective from
September 2011, if there is a delay in the above then our F12
PAT estimates could have downside of up to 4-5% based on
our current assumptions.
What are your production growth targets for FY12?
CIL has set a target of 447 Mt (pessimistic scenario) for F12
and has an internal target of 452 Mt which they are confident of
achieving. The project wise contribution is from:
1. Existing projects – expect 30 Mt in F12 (32Mt in F11 and
31 Mt in F10)
2. Completed projects: - expect 188 Mt in F12 (190 Mt in F11)
3. Ongoing projects: expect 227 Mt in F12
4. Future projects: expect 2 Mt in F12
How is CIL positioned to ensure production growth over
the long term given the recent regulatory hurdles?
• CIL is confident of achieving 6-7% YoY production growth
over the long term. Currently projects with peak capacity of
445 Mt (normative capacity of 425Mt) are in various stages
of development (point 3 above) and will be implemented in
a phased manner by F16-17
• 54 projects with a potential of 154Mt have received forest
as well as environmental clearance.
• 31 projects with potential for 151 Mt have received
environmental clearance but still await forest clearance.
• 11 projects with a potential of19Mt have received forest
clearance but are awaiting environment clearance.
• Projects with a potential of 84Mt are awaiting forest as well
as environmental clearance.
What are your off-take growth targets for FY12 and can the
railways meet the incremental demand for rakes?
CIL has set an off-take target of 454Mt for FY12: The targets for
dispatch for various modes of transport are as under:
Exhibit 1
Rail remains the dominant mode of transport
Mode of transport MGR Road Railway Other
Mt 88 110 241 8
Source: Company data, Morgan Stanley Research
Due to capacity and infrastructure constraints in MGR, and
road transport, the railway remains the main source for
incremental off-take growth. CIL’s target of 454 mt for FY12 is
based on the assumption that it receives an average of 174
rakes/day in the current fiscal year, which the company is
confident of receiving.
Exhibit 2
Expect an average of 174 rakes/day in FY12
Q1 Q2 Q3 Q4
FY2011 154 154 167 173
FY2012 target 173 160 175 183
Source: Company data, Morgan Stanley Research
For the months of April and May 2011, CIL received 175 and
166 rakes per day on average versus its target of 174 and 160
respectively. CIL expects the availability to remain at 160-170
rakes/day till Sep’11 due to a slight moderation during the
monsoon season but in 2HF12 CIL it expects the availability to
increase and end the current fiscal with an average of174-175
rakes/day.
If the rake availability increases to 190/day then CIL can
achieve an off-take target of 473 Mt, its optimistic scenario.
How much will wage costs increase from July 1, 2011?
Wage negotiations with the unions are getting delayed but are
expected to commence soon.
CIL estimates an increase of 20-25% in wage costs and will
start provisioning for the same with effect from July 1, 2011.
Total employee costs are expected to increase by 12-14% for
the current fiscal (wage cost are about 46-48% of total
employee cost).
What will be the impact of OBR adjustment after the
implementation of IFRS accounting standards?
The reversal is expected to boost the bottom line by
approximately Rs25bn and simultaneously Rs140bn of
accrued current liabilities will be transferred to the equity
reserves.
What are the current sales volumes under the E-Auction
route and what are the targets for FY12:
Exhibit 3
E-auction volume target of 55-60 Mt for FY12
E-auction FY10 FY11 FY12E
Mt 43 47 55-60
Source: Company data, Morgan Stanley Research
CIL prefers to maintain an e-auction proportion of 11-12% of
total sales. Roads are the major mode of transport, which
remains the primary constraint from increasing the volumes
through this route.
However, CIL remains confident that even under a pessimistic
scenario it will be able to maintain FY11 volumes of 47 Mt via
e-auctions.
What is the current production of washed coal and how
will it increase?
In FY11 CIL produced a total of 14Mt of washed coal (11 Mt
non-coking coal and 3 Mt coking coal). By FY13 washed coal
volumes are expected to increase by 2Mt.
Currently CIL has undertaken development of 20 washeries
with a total capacity of 111Mt. Out of the above, three
washeries are expected to commence operations over the next
one or two years.
What are CIL’s capex plans?
Rs360Bn is the estimated capex for 142 mining projects with a
total production capacity of 390MT. In addition to the above
Rs40Bn is expected to be spent for developing 20 washieries
with a capacity of 111Mt.
Company Description
Coal India Limited is the largest coal producer in the world with
production of 431mt as of FY10. The company has the largest
reserve base in the world of around 19bt as per JORC
standards. Primarily an open-cast operator, the company has
nine subsidiaries and operates 471 mines in 21 coal fields
across eight states in India.
India Nonferrous Metals & Mining
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India management
meetings hosted by Morgan
Stanley: F12 - year of offtake
We hosted Coal India Limited’s Director of Finance
for a series of investor meetings in Mumbai: From
the Q&A sessions throughout the day, we broadly
categorize the questions and CIL’s responses into the
following seven categories:
• Price increase to pass on wage inflation: CIL will
strive to maintain EBITDA margins at F11 levels and
will make its pricing decision accordingly. If prices
are not lifted in F12 (we expect this in September
2011), then our F12 PAT could have 4-5%
downside.
• Production targets for F12: 447 Mt (pessimistic
scenario per management) and internal target of
452 Mt. We are at 454 Mt.
• Off-take targets for FY12: 454 Mt based on
availability of 174 railway rakes/day for the current
fiscal year. Could achieve 473 Mt if rake availability
increases to 190/day. We expect 451mt.
• Wage cost increase from July 1, 2011: Wage
negotiations are getting delayed but will start
providing for a 20-25% wage hike from 2QF12. We
expect a 35% increase.
• IFRS impact on OBR reversal: Expect bottom line
to increase by Rs25bn. We already adjust for this.
• E-Auction volumes: Sold 47 Mt under e-auctions
in F11 and expect to sell 55-60 Mt in F12. We
expect 61mt.
• Washed coal: Production of 15 Mt in F11 and
expect an increase of 2 Mt by F13, 30 mt capacity
increase in three years from now
Will CIL pass on the incremental cost in wages to end
consumers?
No decision on further price increases has been made so far.
But the company remains confident that the 12.9% average
price hike taken in Feb 2011 and the volume growth targeted in
FY12 will be more than sufficient to overcome any cost
inflation.
However, if cost inflation places CIL’s current EBITDA margins
of 35% under pressure, then management will consider a
further price hike.
We estimate an average price hike of 9% to be effective from
September 2011, if there is a delay in the above then our F12
PAT estimates could have downside of up to 4-5% based on
our current assumptions.
What are your production growth targets for FY12?
CIL has set a target of 447 Mt (pessimistic scenario) for F12
and has an internal target of 452 Mt which they are confident of
achieving. The project wise contribution is from:
1. Existing projects – expect 30 Mt in F12 (32Mt in F11 and
31 Mt in F10)
2. Completed projects: - expect 188 Mt in F12 (190 Mt in F11)
3. Ongoing projects: expect 227 Mt in F12
4. Future projects: expect 2 Mt in F12
How is CIL positioned to ensure production growth over
the long term given the recent regulatory hurdles?
• CIL is confident of achieving 6-7% YoY production growth
over the long term. Currently projects with peak capacity of
445 Mt (normative capacity of 425Mt) are in various stages
of development (point 3 above) and will be implemented in
a phased manner by F16-17
• 54 projects with a potential of 154Mt have received forest
as well as environmental clearance.
• 31 projects with potential for 151 Mt have received
environmental clearance but still await forest clearance.
• 11 projects with a potential of19Mt have received forest
clearance but are awaiting environment clearance.
• Projects with a potential of 84Mt are awaiting forest as well
as environmental clearance.
What are your off-take growth targets for FY12 and can the
railways meet the incremental demand for rakes?
CIL has set an off-take target of 454Mt for FY12: The targets for
dispatch for various modes of transport are as under:
Exhibit 1
Rail remains the dominant mode of transport
Mode of transport MGR Road Railway Other
Mt 88 110 241 8
Source: Company data, Morgan Stanley Research
Due to capacity and infrastructure constraints in MGR, and
road transport, the railway remains the main source for
incremental off-take growth. CIL’s target of 454 mt for FY12 is
based on the assumption that it receives an average of 174
rakes/day in the current fiscal year, which the company is
confident of receiving.
Exhibit 2
Expect an average of 174 rakes/day in FY12
Q1 Q2 Q3 Q4
FY2011 154 154 167 173
FY2012 target 173 160 175 183
Source: Company data, Morgan Stanley Research
For the months of April and May 2011, CIL received 175 and
166 rakes per day on average versus its target of 174 and 160
respectively. CIL expects the availability to remain at 160-170
rakes/day till Sep’11 due to a slight moderation during the
monsoon season but in 2HF12 CIL it expects the availability to
increase and end the current fiscal with an average of174-175
rakes/day.
If the rake availability increases to 190/day then CIL can
achieve an off-take target of 473 Mt, its optimistic scenario.
How much will wage costs increase from July 1, 2011?
Wage negotiations with the unions are getting delayed but are
expected to commence soon.
CIL estimates an increase of 20-25% in wage costs and will
start provisioning for the same with effect from July 1, 2011.
Total employee costs are expected to increase by 12-14% for
the current fiscal (wage cost are about 46-48% of total
employee cost).
What will be the impact of OBR adjustment after the
implementation of IFRS accounting standards?
The reversal is expected to boost the bottom line by
approximately Rs25bn and simultaneously Rs140bn of
accrued current liabilities will be transferred to the equity
reserves.
What are the current sales volumes under the E-Auction
route and what are the targets for FY12:
Exhibit 3
E-auction volume target of 55-60 Mt for FY12
E-auction FY10 FY11 FY12E
Mt 43 47 55-60
Source: Company data, Morgan Stanley Research
CIL prefers to maintain an e-auction proportion of 11-12% of
total sales. Roads are the major mode of transport, which
remains the primary constraint from increasing the volumes
through this route.
However, CIL remains confident that even under a pessimistic
scenario it will be able to maintain FY11 volumes of 47 Mt via
e-auctions.
What is the current production of washed coal and how
will it increase?
In FY11 CIL produced a total of 14Mt of washed coal (11 Mt
non-coking coal and 3 Mt coking coal). By FY13 washed coal
volumes are expected to increase by 2Mt.
Currently CIL has undertaken development of 20 washeries
with a total capacity of 111Mt. Out of the above, three
washeries are expected to commence operations over the next
one or two years.
What are CIL’s capex plans?
Rs360Bn is the estimated capex for 142 mining projects with a
total production capacity of 390MT. In addition to the above
Rs40Bn is expected to be spent for developing 20 washieries
with a capacity of 111Mt.
Company Description
Coal India Limited is the largest coal producer in the world with
production of 431mt as of FY10. The company has the largest
reserve base in the world of around 19bt as per JORC
standards. Primarily an open-cast operator, the company has
nine subsidiaries and operates 471 mines in 21 coal fields
across eight states in India.
India Nonferrous Metals & Mining
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