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Coal India Limited (COAL IN)
OW(V): Q1 FY12 conference call takeaways
Rail wagon availability has improved, helping to lift offtake;
likely to improve further in H2FY12
Higher volumes and price recovery from e-auction sale;
company hints at price hike with wage revision
Maintain Overweight (V) rating and target price of INR472 and
expect 27% EPS CAGR over FY12-14
We expect offtake target of 454MT to be met in the current year: COAL mentioned that
while rail wagon availability has been one of the key concerns in the past, this improved
from 154 to 168 rakes/day in Q1, with the company expecting further improvements to 200
rakes/day in H2. COAL is confident about logistics since it communicates with senior
management in Railways on a daily basis. We expect strong Q1 offtake to be sustained in
FY12 and beyond.
Company confident about its 452MTproduction target for FY12: The company
highlighted that the only hurdle in meeting its production target is additional land
acquisition, as most other mines have clearance in place. COAL is confident about meeting
its production target, which suggests an offtake above 454MT, especially as rail wagon
availability has improved.
Short-term sale volume and price recovery shows buyers urgency – both e-auction and
additional sales to NTPC: COAL was able to sell c12.7% through e-auction in Q1 (HSBCe
11.2%) at double the price of regular sales (5% higher than our estimate). Further it was able
to get a significant premium (cINR800/ton) from NTPC for a short-term one-time sale of
2.5MT, which shows the willingness of power companies to pay more for availability.
Wage hike provisioning in H2, price hike also likely though with a lag: COAL has
initiated the wage negotiation process (applicable from 1 July 2011), which should take
another 6-12 months. The company hinted that it will try to minimise any subsequent price
hike which may happen if it is unable to cover the gap from wage cost increases, but this
will be with a lag. We have factored a 10% increase in the price of DE&F category coal (or
a c5.7% increase across all grades of coal).
OW(V), TP INR472: We value COAL based on a combination of a DCF and an earnings
multiple based valuation and maintain our target price of INR472. We are OW(V) on COAL
due to its strong outlook and our increased confidence in its earnings visibility (see also
Upgrade to OW(V): Beats expectations, 17 August 2011). At our TP, the stock implies a PE
of 14.5x 24M EPS (currently trading at PE of 13.4x 12M forward EPS) and 9.0x
EV/EBITDA. Downside risks are lower-than-expected offtake from logistics constraints and
implementation of the MMDR Bill, with COAL unable to pass on the cost to its customers.
Key takeaways from conference call hosted by Coal India
1. Rake availability improved during Q1 and the company expects this to improve further during
the year, hence 454MT offtake target for FY12 is achievable: COAL stated that railways provided 168
rakes/day in Q1 against 154 last year, and it expects a further 200 rakes/day in the dry season (2HFY12).
Hence, COAL is confident about meeting its offtake target of 454MT in FY12.
2. The company reported higher e-auction quantity and prices in Q1: COAL sold 13.53MT (12.7%
of its offtake) on e-auction platform in Q1 at an average price of INR2,245, c100% above the average
notified price. We have previously highlighted better realisation through e-auction in our report, Upgrade
to OW(V): Beats expectations, 17 August 2011.
3. Wage increase negotiations to be faster: Wage increases are due from 1 July 2011, and the company
has already constituted a meeting (to be held 20 August). The process of negotiation usually takes a long
time but COAL is trying to complete this in the next 5-6 months.
4. Price hike likely: COAL indicated that if the wage hike cost is not covered through its recent price
hike in February 2011, it will look to adopt the same route of raising prices as in the past. Hence we
expect a price hike post the wage hike, though there could be a few months lag between the two events.
5. Power sector customers willing to pay a higher price to COAL for increased supply: COAL has
managed to contract 2.5MT of coal (from its stock) to NTPC (single largest customer of COAL) in FY12
at a significantly higher price than notified (additional cINR 800/ton over notified price), which indicates
that customers are ready to pay higher if COAL is able to supply the quantity.
6. Production target of 452MT in FY12 can be met; offtake target set to exceed our estimate: The
company expects to meet its FY12 production target of 452MT as this is likely to come from projects that
already have clearance and the only issue is availability of land. If COAL is able to meet its production
target, then the offtake will be higher than the target, as it expects to liquidate 25MT of coal stock (18MT
already liquidated by mid August). Normally most of the stock is liquidated in 1H.
Maintain target price of INR472 and Overweight (V) rating
We value COAL based on a combination of a DCF and an earnings multiple based valuation (see
Exhibits 1-1C). For DCF, we discount the cash flows assuming an unchanged WACC of 11.3% (cost of
equity of 11.8%, cost of debt of 7.5% and beta of 0.95) to arrive at our value of INR462 per share. We
value COAL at 15x 24-month forward EPS and 9x 24-month forward EV/EBITDA. Our target price of
INR472 (unchanged) is based on weighted-average of DCF, PE and EV/EBITDA, to which we assign a
weight of 50%, 25% and 25%, respectively. At our target price, the stock implies a PE of 14.5x 24-month
EPS (currently trading at PE of 13.4x 12-month forward EPS) and 9.0x EV/EBITDA.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points
above and below the hurdle rate for Indian stocks of 11%. COAL is classified as a volatile stock in our
research model, which implies a Neutral band of 1-21%. We maintain our Overweight (V) rating as the
potential return of 22.3% (including the dividend yield) falls above the Neutral band.
We are Overweight (V) on COAL given its strong outlook and our increased confidence in its earnings
visibility (EPS CAGR of 27% over FY12-14). COAL is likely to benefit from a surge in coal demand in
India, but we would watch its ability to increase production, which could limit volume growth in the long
term. Despite the strong price movement since its IPO (up c59% while the Sensex is down c20%), we
believe the stock is still reasonably valued at PE of 13.4x (on 12-month forward EPS) and EV/EBITDA
of 7.2x (on 12-month forward EBITDA) supported by the strong earnings outlook.
Key risks
Key downside risks to our rating are 1) lower-than-expected offtake because of logistics constraints, and
2) implementation of the MMDR Bill. In our view, COAL would have to raise product prices by 8-9% to
offset the costs from implementation of the MMDR Bill (see Exhibit 3). Exhibit 2 sets out some of the
downside risks to our forecasts and likely upside factors.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Limited (COAL IN)
OW(V): Q1 FY12 conference call takeaways
Rail wagon availability has improved, helping to lift offtake;
likely to improve further in H2FY12
Higher volumes and price recovery from e-auction sale;
company hints at price hike with wage revision
Maintain Overweight (V) rating and target price of INR472 and
expect 27% EPS CAGR over FY12-14
We expect offtake target of 454MT to be met in the current year: COAL mentioned that
while rail wagon availability has been one of the key concerns in the past, this improved
from 154 to 168 rakes/day in Q1, with the company expecting further improvements to 200
rakes/day in H2. COAL is confident about logistics since it communicates with senior
management in Railways on a daily basis. We expect strong Q1 offtake to be sustained in
FY12 and beyond.
Company confident about its 452MTproduction target for FY12: The company
highlighted that the only hurdle in meeting its production target is additional land
acquisition, as most other mines have clearance in place. COAL is confident about meeting
its production target, which suggests an offtake above 454MT, especially as rail wagon
availability has improved.
Short-term sale volume and price recovery shows buyers urgency – both e-auction and
additional sales to NTPC: COAL was able to sell c12.7% through e-auction in Q1 (HSBCe
11.2%) at double the price of regular sales (5% higher than our estimate). Further it was able
to get a significant premium (cINR800/ton) from NTPC for a short-term one-time sale of
2.5MT, which shows the willingness of power companies to pay more for availability.
Wage hike provisioning in H2, price hike also likely though with a lag: COAL has
initiated the wage negotiation process (applicable from 1 July 2011), which should take
another 6-12 months. The company hinted that it will try to minimise any subsequent price
hike which may happen if it is unable to cover the gap from wage cost increases, but this
will be with a lag. We have factored a 10% increase in the price of DE&F category coal (or
a c5.7% increase across all grades of coal).
OW(V), TP INR472: We value COAL based on a combination of a DCF and an earnings
multiple based valuation and maintain our target price of INR472. We are OW(V) on COAL
due to its strong outlook and our increased confidence in its earnings visibility (see also
Upgrade to OW(V): Beats expectations, 17 August 2011). At our TP, the stock implies a PE
of 14.5x 24M EPS (currently trading at PE of 13.4x 12M forward EPS) and 9.0x
EV/EBITDA. Downside risks are lower-than-expected offtake from logistics constraints and
implementation of the MMDR Bill, with COAL unable to pass on the cost to its customers.
Key takeaways from conference call hosted by Coal India
1. Rake availability improved during Q1 and the company expects this to improve further during
the year, hence 454MT offtake target for FY12 is achievable: COAL stated that railways provided 168
rakes/day in Q1 against 154 last year, and it expects a further 200 rakes/day in the dry season (2HFY12).
Hence, COAL is confident about meeting its offtake target of 454MT in FY12.
2. The company reported higher e-auction quantity and prices in Q1: COAL sold 13.53MT (12.7%
of its offtake) on e-auction platform in Q1 at an average price of INR2,245, c100% above the average
notified price. We have previously highlighted better realisation through e-auction in our report, Upgrade
to OW(V): Beats expectations, 17 August 2011.
3. Wage increase negotiations to be faster: Wage increases are due from 1 July 2011, and the company
has already constituted a meeting (to be held 20 August). The process of negotiation usually takes a long
time but COAL is trying to complete this in the next 5-6 months.
4. Price hike likely: COAL indicated that if the wage hike cost is not covered through its recent price
hike in February 2011, it will look to adopt the same route of raising prices as in the past. Hence we
expect a price hike post the wage hike, though there could be a few months lag between the two events.
5. Power sector customers willing to pay a higher price to COAL for increased supply: COAL has
managed to contract 2.5MT of coal (from its stock) to NTPC (single largest customer of COAL) in FY12
at a significantly higher price than notified (additional cINR 800/ton over notified price), which indicates
that customers are ready to pay higher if COAL is able to supply the quantity.
6. Production target of 452MT in FY12 can be met; offtake target set to exceed our estimate: The
company expects to meet its FY12 production target of 452MT as this is likely to come from projects that
already have clearance and the only issue is availability of land. If COAL is able to meet its production
target, then the offtake will be higher than the target, as it expects to liquidate 25MT of coal stock (18MT
already liquidated by mid August). Normally most of the stock is liquidated in 1H.
Maintain target price of INR472 and Overweight (V) rating
We value COAL based on a combination of a DCF and an earnings multiple based valuation (see
Exhibits 1-1C). For DCF, we discount the cash flows assuming an unchanged WACC of 11.3% (cost of
equity of 11.8%, cost of debt of 7.5% and beta of 0.95) to arrive at our value of INR462 per share. We
value COAL at 15x 24-month forward EPS and 9x 24-month forward EV/EBITDA. Our target price of
INR472 (unchanged) is based on weighted-average of DCF, PE and EV/EBITDA, to which we assign a
weight of 50%, 25% and 25%, respectively. At our target price, the stock implies a PE of 14.5x 24-month
EPS (currently trading at PE of 13.4x 12-month forward EPS) and 9.0x EV/EBITDA.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points
above and below the hurdle rate for Indian stocks of 11%. COAL is classified as a volatile stock in our
research model, which implies a Neutral band of 1-21%. We maintain our Overweight (V) rating as the
potential return of 22.3% (including the dividend yield) falls above the Neutral band.
We are Overweight (V) on COAL given its strong outlook and our increased confidence in its earnings
visibility (EPS CAGR of 27% over FY12-14). COAL is likely to benefit from a surge in coal demand in
India, but we would watch its ability to increase production, which could limit volume growth in the long
term. Despite the strong price movement since its IPO (up c59% while the Sensex is down c20%), we
believe the stock is still reasonably valued at PE of 13.4x (on 12-month forward EPS) and EV/EBITDA
of 7.2x (on 12-month forward EBITDA) supported by the strong earnings outlook.
Key risks
Key downside risks to our rating are 1) lower-than-expected offtake because of logistics constraints, and
2) implementation of the MMDR Bill. In our view, COAL would have to raise product prices by 8-9% to
offset the costs from implementation of the MMDR Bill (see Exhibit 3). Exhibit 2 sets out some of the
downside risks to our forecasts and likely upside factors.
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