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Coal India’s target of 556.4MT by FY17E implies CAGR of 4%: As
per media reports (Bloomberg), the Coal Minister has commented in
Parliament that Coal India’s output target for FY17 stood at 556.4MT.
Given the FY12 output target of 452MT, this implies a production
CAGR of ~4%, sharply lower than the earlier expected 5-7%. We
believe that volume growth remains challenging for COAL and that
regulatory issues (environmental clearances, land acquisition, R&R
issues) need to be addressed if COAL were to increase its offtake
materially from here.
September quarter to be weaker than expected: While management in
its analyst call had highlighted that July-Sept would be a weak quarter
given the high rains, we believe the heavy rainfall in parts of
Eastern/Central India severely impacted both production and offtake for
COAL in August. While COAL has stopped the practice of giving out
monthly production and offtake numbers, various media reports (TOI)
have quoted top management as saying that COAL suffered an output
loss of 7.7MT in August and as a result YTD to August, COAL is 11MT
behind its production target (FY12 production target is 452MT). While
seasonally the Oct-March period has higher offtake and dispatches, we
believe given the size of the miss so far, offtake would need rake
availability to improve sharply from the average 175 rakes per day that
COAL required from the Railways to meet the FY12 off-take target.
News flow on the margin to deteriorate on costs, pricing: Over the
next 2-3 quarters, wage costs are likely to increase significantly as
COAL makes provisions, while ASPs on the market priced volumes
(~20-25% of volumes, much higher share of EBITDA in our view) are
likely to see some impact from the moderating global spot prices (hard
coking coal contracts for the Dec quarter have been settled at $285/MT
between a steel mill and miner, compared to $330/MT earlier in the year,
implying a 14% decline).
Court ruling on Jharkhand mines issue keenly awaited: The
Jharkhand High Court has stayed the order of the State Pollution Control
Board which was to stop production in some of BCCL’s mines (which
could impact production upto 40K per day). As per media reports
(Bloomberg), the court has deferred the hearing until Sept 20.
Stock not immune to bad news: In our view, COAL’s earnings are not
as defensive as many seem to believe, and high valuations cannot be
supported in an environment in which negative news flow on costs,
volumes and prices could increase.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India’s target of 556.4MT by FY17E implies CAGR of 4%: As
per media reports (Bloomberg), the Coal Minister has commented in
Parliament that Coal India’s output target for FY17 stood at 556.4MT.
Given the FY12 output target of 452MT, this implies a production
CAGR of ~4%, sharply lower than the earlier expected 5-7%. We
believe that volume growth remains challenging for COAL and that
regulatory issues (environmental clearances, land acquisition, R&R
issues) need to be addressed if COAL were to increase its offtake
materially from here.
September quarter to be weaker than expected: While management in
its analyst call had highlighted that July-Sept would be a weak quarter
given the high rains, we believe the heavy rainfall in parts of
Eastern/Central India severely impacted both production and offtake for
COAL in August. While COAL has stopped the practice of giving out
monthly production and offtake numbers, various media reports (TOI)
have quoted top management as saying that COAL suffered an output
loss of 7.7MT in August and as a result YTD to August, COAL is 11MT
behind its production target (FY12 production target is 452MT). While
seasonally the Oct-March period has higher offtake and dispatches, we
believe given the size of the miss so far, offtake would need rake
availability to improve sharply from the average 175 rakes per day that
COAL required from the Railways to meet the FY12 off-take target.
News flow on the margin to deteriorate on costs, pricing: Over the
next 2-3 quarters, wage costs are likely to increase significantly as
COAL makes provisions, while ASPs on the market priced volumes
(~20-25% of volumes, much higher share of EBITDA in our view) are
likely to see some impact from the moderating global spot prices (hard
coking coal contracts for the Dec quarter have been settled at $285/MT
between a steel mill and miner, compared to $330/MT earlier in the year,
implying a 14% decline).
Court ruling on Jharkhand mines issue keenly awaited: The
Jharkhand High Court has stayed the order of the State Pollution Control
Board which was to stop production in some of BCCL’s mines (which
could impact production upto 40K per day). As per media reports
(Bloomberg), the court has deferred the hearing until Sept 20.
Stock not immune to bad news: In our view, COAL’s earnings are not
as defensive as many seem to believe, and high valuations cannot be
supported in an environment in which negative news flow on costs,
volumes and prices could increase.
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