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India Equity Research Reports, IPO and Stock News
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● Coal India’s 1Q FY12 production was 2.4% below the target,
resulting in coal supply to the power sector being 7% lower than
the target. Supply to NTPC during April-July 2011 was 8.7% lower
than the target.
● Coal India is expected to supply 347 mn tonnes of coal to the
power sector in FY12. But our interaction with CEA suggests that
it would be able to supply only 320 mn tonnes. While Coal India is
confident of meeting its supply commitments for the year, we note
that its supply targets were missed by 12% during July-August.
● We see likely low coal supplies as the key risk to our FY12
estimates for utility stocks. Our sensitivity analysis suggests that a
project’s earnings would be impacted by 20-24% for a 10% fall in
the plant’s availability on account of low fuel supplies.
● To avoid penalties, Coal India could first fulfil its supply obligation
of 306 mn tonnes under its fuel supply agreements/FSA (mostly
signed for projects commissioned up to March 2009).
● This implies that companies with a higher share of post-March
2009 coal linkage-based projects (or projects with no FSA) are at
a higher risk from potential coal deficits and would witness sharp
earnings cuts (Figure 3). We expect the domestic coal deficit
situation to worsen and maintain our cautious sector view.
Coal India falls short of its supply targets in 1Q FY12
As per media reports, Coal India’s production at 96.3 mn tonnes in 1Q
FY12 was 2.4% lower than the targeted production of 98.7 mn tonnes.
Coal India claims that this miss was due to local law and order
problems and adverse weather conditions (heavy rains), impacting
coal supply to the power sector. Against the targeted supply of 80.4
mn tonnes earmarked for the power sector during 1Q FY12, Coal
India’s despatches fell short by 7% at 74.7 mn tonnes
According to the Ministry of Coal, coal supply to NTPC during April-
July 2011 fell short of Coal India’s target by 8.7%. Similarly, NALCO’s
captive power and aluminium plants were supplied about 96% of their
annual contracted quantity (ACQ).
Industry experts expect a miss in FY12 targets …
Of its FY12 targeted production of 452 mn tonnes, 347 mn tonnes have
been earmarked for the power sector. However, our interaction with CEA
suggests that Coal India would be able to supply only 320 mn tonnes of
coal to the power sector, indicating a further downside risk to our
estimates. Media reports also indicate that Coal India’s production fell
18% YoY to 6.1 mn tonnes in August due to the dengue outbreak in
Orissa (impacting labour availability) and heavy rains.
… though Coal India is confident of meeting its targets
Coal India expects to make up for the 7% shortfall in coal supply to the
power sector during 1Q12 in 2Q12 and is also confident of meeting its
full-year target through higher production and inventory liquidation.
However, its targets were missed by 12% in July-August, too.
Earnings sensitivity to coal deficits is high
As highlighted in our March 2011 report, Domestic fuel deficit a structural
risk, all projects, including those under the regulated model with an
assured RoE, face the fuel risk. We reiterate that contrary to the general
perception, though regulated projects (such as NTPC’s) are insulated
from a fuel price risk, the unavailability of fuel does pose a serious risk to
their earnings. Our sensitivity suggests that for every 10% fall in plant
availability (led by fuel deficit), a regulated project’s earnings fall by 24%.
This is because the pass-through of fixed costs and the assured RoE are
subject to the project demonstrating 85% plant availability (PAF) and are
pro-rated for a fall in PAF. Earnings sensitivity for a 10% fall in PAF for
Case I/II and merchant projects is also high at 20-24%.
Companies with recent projects are at a higher risk
Linkage coal projects commissioned up to March 2009 have
contractually binding fuel supply agreements (FSA), with a penalty
structure for Coal India for not honouring its coal supply commitments.
Most projects implemented thereafter do not have such FSA (they
only have a letter of assurance/MoU which has no contractual
obligation). We thus believe that most of the available coal would first
be supplied to projects up to March 2009. Since 306 mn tonnes of
coal is already contracted under these FSAs, a potential miss in FY12
targeted coal supply would leave very little coal for projects
commissioned after March 2009 (Figure 3), implying a risk of higher
earnings downgrades.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Coal India’s 1Q FY12 production was 2.4% below the target,
resulting in coal supply to the power sector being 7% lower than
the target. Supply to NTPC during April-July 2011 was 8.7% lower
than the target.
● Coal India is expected to supply 347 mn tonnes of coal to the
power sector in FY12. But our interaction with CEA suggests that
it would be able to supply only 320 mn tonnes. While Coal India is
confident of meeting its supply commitments for the year, we note
that its supply targets were missed by 12% during July-August.
● We see likely low coal supplies as the key risk to our FY12
estimates for utility stocks. Our sensitivity analysis suggests that a
project’s earnings would be impacted by 20-24% for a 10% fall in
the plant’s availability on account of low fuel supplies.
● To avoid penalties, Coal India could first fulfil its supply obligation
of 306 mn tonnes under its fuel supply agreements/FSA (mostly
signed for projects commissioned up to March 2009).
● This implies that companies with a higher share of post-March
2009 coal linkage-based projects (or projects with no FSA) are at
a higher risk from potential coal deficits and would witness sharp
earnings cuts (Figure 3). We expect the domestic coal deficit
situation to worsen and maintain our cautious sector view.
Coal India falls short of its supply targets in 1Q FY12
As per media reports, Coal India’s production at 96.3 mn tonnes in 1Q
FY12 was 2.4% lower than the targeted production of 98.7 mn tonnes.
Coal India claims that this miss was due to local law and order
problems and adverse weather conditions (heavy rains), impacting
coal supply to the power sector. Against the targeted supply of 80.4
mn tonnes earmarked for the power sector during 1Q FY12, Coal
India’s despatches fell short by 7% at 74.7 mn tonnes
According to the Ministry of Coal, coal supply to NTPC during April-
July 2011 fell short of Coal India’s target by 8.7%. Similarly, NALCO’s
captive power and aluminium plants were supplied about 96% of their
annual contracted quantity (ACQ).
Industry experts expect a miss in FY12 targets …
Of its FY12 targeted production of 452 mn tonnes, 347 mn tonnes have
been earmarked for the power sector. However, our interaction with CEA
suggests that Coal India would be able to supply only 320 mn tonnes of
coal to the power sector, indicating a further downside risk to our
estimates. Media reports also indicate that Coal India’s production fell
18% YoY to 6.1 mn tonnes in August due to the dengue outbreak in
Orissa (impacting labour availability) and heavy rains.
… though Coal India is confident of meeting its targets
Coal India expects to make up for the 7% shortfall in coal supply to the
power sector during 1Q12 in 2Q12 and is also confident of meeting its
full-year target through higher production and inventory liquidation.
However, its targets were missed by 12% in July-August, too.
Earnings sensitivity to coal deficits is high
As highlighted in our March 2011 report, Domestic fuel deficit a structural
risk, all projects, including those under the regulated model with an
assured RoE, face the fuel risk. We reiterate that contrary to the general
perception, though regulated projects (such as NTPC’s) are insulated
from a fuel price risk, the unavailability of fuel does pose a serious risk to
their earnings. Our sensitivity suggests that for every 10% fall in plant
availability (led by fuel deficit), a regulated project’s earnings fall by 24%.
This is because the pass-through of fixed costs and the assured RoE are
subject to the project demonstrating 85% plant availability (PAF) and are
pro-rated for a fall in PAF. Earnings sensitivity for a 10% fall in PAF for
Case I/II and merchant projects is also high at 20-24%.
Companies with recent projects are at a higher risk
Linkage coal projects commissioned up to March 2009 have
contractually binding fuel supply agreements (FSA), with a penalty
structure for Coal India for not honouring its coal supply commitments.
Most projects implemented thereafter do not have such FSA (they
only have a letter of assurance/MoU which has no contractual
obligation). We thus believe that most of the available coal would first
be supplied to projects up to March 2009. Since 306 mn tonnes of
coal is already contracted under these FSAs, a potential miss in FY12
targeted coal supply would leave very little coal for projects
commissioned after March 2009 (Figure 3), implying a risk of higher
earnings downgrades.
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