Coal India - What next?; Sell; Target price Rs315.00:: RBS

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Coal India
What next?
In the wake of the GoM approving the draft MMDR bill, which proposes 26% profit
sharing with locals, we estimate it  could have  a 19-26% impact on Coal India's
FY12/13 earnings. We forecast that  an  additional 11-16% price increase will be
necessary to offset the same. We maintain a Sell rating.


Profit sharing clause could have a 19-26% impact on FY12/13 earnings
The Group of Ministers (GoM) recently approved the draft bill of the Mines and Minerals
Development and Regulation Act 2010, which proposes 26% profit sharing for coal miners.
We estimate this could have a 19-26% impact on Coal India’s FY12/13 earnings, depending
on whether interest income (30% of PAT) is excluded from the computation. The draft bill is
scheduled to be sent next to the cabinet for approval, after which it could go before the
monsoon session of parliament in August, prior to becoming law.
We estimate a need for an incremental price hike of 12-16% to offset the impact
Coal India continues to be constrained on the volumes front, due to logistical and regulatory
hurdles. We believe pricing is the key lever through which any profit-sharing liability could be
compensated. However, Coal India implemented an 11% average price increase in late
February via its move to differential pricing. Although the last price hike for regulated
consumers such as power utilities was in October 2009, we believe a further significant price
hike could be difficult given inflationary ramifications and the state electricity boards’ current
financial situations. We model average realisations of Rs1,370/t and Rs1,452/t for FY12 and
FY13, respectively, which would partly compensate for the wage revision due this month. We
estimate a further price hike of 12-16% for regulated entities is necessary to offset the profitsharing
liability.
We estimate an Rs30-40/share impact on valuation; maintain Sell
Assuming no price hike to offset the incremental profit-sharing liability, we estimate our
valuation could drop Rs30-40 to Rs275-285/share, depending on whether interest income is
included/excluded from the final formula. Earnings have increased at a 12% CAGR over
FY06-11, and we expect the company to attempt to grow at a similar rate in the coming
years. Awaiting further clarity, we maintain our current estimates and maintain a Sell with a
target price of Rs315.