Proposed profit-sharing regulation likely to have limited impact:: Daiwa

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


 Draft mining bill approved
 Coal companies to set aside
26% of their PAT for projectaffected
people
 CIL should see minimal
impact (5-6% of earnings)
 What's new
On 7 July 2011, a group of ministers
passed the draft mining bill (MMDR
2011), which stipulates that coal
companies set aside 26% of their
PAT for project-affected people, and
non-coal mining companies set
aside 100% of royalty payouts.
Although this is just a draft bill, and
has yet to be passed by Parliament
(we expect this to happen later this
year), we believe that investors
would view this draft regulation as
negative for coal companies.
 What's the impact
Over the past five years, Coal India
(CIL) has spent Rs14.8-22.3bn
annually on social overheads, rising
at a CAGR of 10.3%. For FY11,
social-overhead expenses accounted
for 4.3% of CIL’s revenue,
translating into 21% of its reported
PAT and 29% of its operating PAT.
Background on social
overheads: CIL actively promotes
various programmes to enhance the
health, education and economic
well-being of the communities
located near its mines, and focuses
on project-affected persons and
persons living within a 15km radius
of its project sites, which is in line
with the thinking behind the
allocation of 26% of PAT for projectaffected
people.
Minimal impact on earnings:
According to CIL management, if
the profit-sharing regulation is
passed, CIL should be allowed to set
off the impact of the 26% of PAT
requirement against the socialoverhead
expenditure that it already
incurs. In our view, the company
may have to set aside only 5-6% of
its earnings to meet this
requirement, which management
says it will be able to pass on to
customers, as it has done in the past.
The draft regulation states the
amount collected by this exercise
will be deposited in a District
Mineral Development Trust, and
that it will be used for the welfare of
the area/people affected by mining
activity. This is the only point of
contention, in our view. Currently,
CIL oversees its own spending on
social overheads, whereas under the
proposed regulation it may be asked
to deposit the same amount into a
fund that will then be distributed by
the state government.
 What we recommend
We maintain our Outperform (2)
rating and DCF-based six-month
target price of Rs450 for CIL. We
believe DCF is the most appropriate
method to value CIL, as it captures
the company’s long-term earnings
potential from its large coal reserves,
set to be realised by the ramp-up of
production and an increase in the
mix of market-linked sales. We see
inadequate evacuation infrastructure
as the key risk for CIL.
 How we differ
The market consensus forecasts
offtake growth of 4-5% YoY for FY12,
while we forecast 8.5% YoY. We also
continue to account for overburden
(OBR) expenses, which have been in
the range of Rs20-30bn over the
past three years.