Coal India - Certain in uncertain environment:: Macquarie Research,

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Coal India
Certain in uncertain environment
Event
 1QFY12 results in line: Coal India (CIL) reported earnings for 1Q FY12,
which were mostly in line with Street estimates. CIL remains a good
defensive play in the current environment. However, we believe valuations
remain rich and we maintain our Neutral recommendation and target price.
Impact
 Robust 1QFY12 results:  CIL reported net sales at Rs141bn with sales of
106mt of coal, up 5% YoY, and realisations up 12% YoY. EBITDA at
Rs48bn is up 59% YoY as costs remained flat. PAT reported at Rs41bn, up
64% helped by 32% increase in other income.
 Wage renegotiation – still to start: The NCWA renegotiation is yet to start,
and we continue to believe that this will take time, versus the Street’s
expectation of a quick resolution and price increase in September itself. The
company will start providing around 20% increase from current quarter and
has already taken a price increase in Feb this year as an offset.
 Tax on profit – remains a risk: The new draft of the mining bill talks about
levying a 26% tax on profits to share with traditional land owners. This would
directly affect CIL and could erase c.13% of its FY12E earnings; thus, it is a
key overhang on the stock.
 Inventory liquidation – but production lower: CIL has liquidated 10mnt of
inventory in this quarter but production is a lowly 96mnt. We are building in
456mnt for the full year. Q2 is normally a weak quarter due to the rainy
season; hence any visible increase is possible only in second half.
Earnings and target price revision
 We fine-tune 2012-13E EPS after the quarterly results.
Price catalyst
 12-month price target: Rs382.00 based on a DCF methodology.
 Catalyst: Increase in e auction prices
Action and recommendation
 Maintain Neutral: CIL looks fully valued at 17x PER on FY12E. We think that
a better entry will be available if proposed profit sharing clause is actually
implemented. Maintain Neutral.