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Coal India (COAL)
Metals & Mining
Mining Bill moves ahead. The Union Cabinet has approved the Mines and Minerals
(Development and Regulation) Bill (MMDR Bill), 2011 that aims to introduce a better
legislative environment for attracting investment and technology into the mining sector.
The contentious 26% profit sharing for coal mining leases remains, though we see the
earnings impact curtailed to 10-12% of FY2013E earnings that could be further offset
by a reduction extant social overhead and/or price increase (2-5%) to absorb the impact
of profit sharing. We maintain ADD rating and target price of Rs454/share.
Mining tax to be levied on previous year’s profits, likely to impact earnings by ~12%
The draft bill as approved by the Cabinet maintains the proposal of sharing 26% of mining profits
of the preceding year to be contributed to the District Mineral Foundation. The levy of mining tax
on the preceding year’s profits increases the likelihood of it being construed as a tax deductible
expense, akin to royalty and cess. We note that the full EPS impact of a mining tax will reduce to
just 13% for FY2013E EPS, assuming tax deductibility of the contribution (refer Exhibit 1 for
impact analysis under different scenarios) even without considering a corresponding price increase
to offset the impact such contributions.
Timelines – unlikely to be implemented before mid-FY2013E at best
The Bill has been approved by the Cabinet and is proposed to be tabled in the Parliament in the
winter session. Post this, there would be comments from the standing committee. Findings and
comments of the standing committee may or may not be accepted by the Government. In our
view, the implementation of the bill is unlikely before mid-FY2013E. We also note that the
implementation timelines of the bill could correspond with the end of the wage negotiation
process which would allow CIL to absorb the entire impact with a single price hike.
Trimming of CSR expense and pricing power could offset potential impact
CIL incurred Rs22.3 bn (20% of PAT) under Social Overhead expenses in FY2011, which included a
combination of employee as well as local community welfare expenses. Even if CIL does not have
the liberty of doing away entirely with its CSR commitments —a 25% reduction in social overhead
expenses (along with tax deductibility allowed) could reduce the impact of the mining tax to 10%
of FY2013E EPS. Further, imposition of the mining tax strengthens the case for a judicious price
increase in FY2013E. The mining bill, if passed in its current form (even if applicable by FY2013E),
will strengthen CIL’s case to increase prices for the power sector, which has not seen a price
increase since October 2009. A price increase of ~3.5% (assuming tax deductibility) will suffice to
compensate the incidence of the mining tax.
Our current estimates build a modest 3% yoy increase in prices in FY2013E, primarily from a
favorable sales mix and better realizations for market-driven coal realizations. The CIL
management has already stated its intent of compensating any incidence of the mining bill
through a price hike. This is aligned with CIL’s pricing policy of maintaining margins by
taking price increases to offset any incremental cost incidence.
Full impact of mining tax still implies a 20% upside from CMP, reiterate ADD
We note that the worst case impact of a mining tax (with CIL being taxed the entire 26% of
preceding year’s PAT and tax deductibility) would reduce our fair value estimate of CIL to
Rs402/share (20% above the CMP). Further, as discussed above, the eventual impact could
be further muted owing to mix of offsetting levers available. We maintain our ADD rating
and target price of Rs454/share. Our target price is based on 13X FY2013E EPS adjusted for
overburden removal and interest income and implies an EV/EBITDA of 9X on FY2013E
EBITDA (adjusted for overburden removal). CIL currently trades at 8X FY2013E EPS (adjusted)
and 6X FY2013E EBITDA (adjusted).
Key excerpts from the draft Mines and Mineral (Development and Regulation)
Bill, 2011
We highlight below some key excerpts of the draft MMDR Bill relevant to profit sharing for
coal miners.
Profit sharing percentage at 26% of preceding year’s PAT – Chapter VIII, Clause 42.2 (b)
states – “in case of coal and lignite, an amount equal to twenty-six per cent. of the profit
to be called as profit sharing percentage (after deduction of tax paid) of the immediately
preceding financial year from mining related operations in respect of the lease”.
The clause further provides that – “in respect of coal minerals the Central Government
may, after taking into consideration the report and recommendations of the National
Mining Regulatory Authority, by notification, revise the profit sharing percentage, or
specify such other method as may be prescribed for calculation of amount to be paid to
the District Mineral Foundation”.
Our target price is based on 13X FY2013E adjusted-EPS
Computation of CIL's target price
EBITDA (Rs bn) 213
OBR (Rs bn) 32
Adjusted EBITDA (Rs bn) 246
Interest income (Rs bn) 57
PAT (Rs bn) 185
Adjusted PAT (Rs bn) 168
EPS (Rs/share) 29
Adjusted EPS (Rs/share) 27
P/E on FY2013E adjusted PAT (X) 13.0
Value of coal business (Rs bn) 2,180
Cash (Rs bn) 689
Market Cap (Rs bn) 2,870
Target price 454
Notes.
(1) Adjusted EBITDA is calculated after removing the effect OBR adjustment.
(2) Adjusted PAT is calculating after removing the effect of
OBR adjustment and interest income net of taxes.
Source: Kotak Institutional Equities, Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India (COAL)
Metals & Mining
Mining Bill moves ahead. The Union Cabinet has approved the Mines and Minerals
(Development and Regulation) Bill (MMDR Bill), 2011 that aims to introduce a better
legislative environment for attracting investment and technology into the mining sector.
The contentious 26% profit sharing for coal mining leases remains, though we see the
earnings impact curtailed to 10-12% of FY2013E earnings that could be further offset
by a reduction extant social overhead and/or price increase (2-5%) to absorb the impact
of profit sharing. We maintain ADD rating and target price of Rs454/share.
Mining tax to be levied on previous year’s profits, likely to impact earnings by ~12%
The draft bill as approved by the Cabinet maintains the proposal of sharing 26% of mining profits
of the preceding year to be contributed to the District Mineral Foundation. The levy of mining tax
on the preceding year’s profits increases the likelihood of it being construed as a tax deductible
expense, akin to royalty and cess. We note that the full EPS impact of a mining tax will reduce to
just 13% for FY2013E EPS, assuming tax deductibility of the contribution (refer Exhibit 1 for
impact analysis under different scenarios) even without considering a corresponding price increase
to offset the impact such contributions.
Timelines – unlikely to be implemented before mid-FY2013E at best
The Bill has been approved by the Cabinet and is proposed to be tabled in the Parliament in the
winter session. Post this, there would be comments from the standing committee. Findings and
comments of the standing committee may or may not be accepted by the Government. In our
view, the implementation of the bill is unlikely before mid-FY2013E. We also note that the
implementation timelines of the bill could correspond with the end of the wage negotiation
process which would allow CIL to absorb the entire impact with a single price hike.
Trimming of CSR expense and pricing power could offset potential impact
CIL incurred Rs22.3 bn (20% of PAT) under Social Overhead expenses in FY2011, which included a
combination of employee as well as local community welfare expenses. Even if CIL does not have
the liberty of doing away entirely with its CSR commitments —a 25% reduction in social overhead
expenses (along with tax deductibility allowed) could reduce the impact of the mining tax to 10%
of FY2013E EPS. Further, imposition of the mining tax strengthens the case for a judicious price
increase in FY2013E. The mining bill, if passed in its current form (even if applicable by FY2013E),
will strengthen CIL’s case to increase prices for the power sector, which has not seen a price
increase since October 2009. A price increase of ~3.5% (assuming tax deductibility) will suffice to
compensate the incidence of the mining tax.
Our current estimates build a modest 3% yoy increase in prices in FY2013E, primarily from a
favorable sales mix and better realizations for market-driven coal realizations. The CIL
management has already stated its intent of compensating any incidence of the mining bill
through a price hike. This is aligned with CIL’s pricing policy of maintaining margins by
taking price increases to offset any incremental cost incidence.
Full impact of mining tax still implies a 20% upside from CMP, reiterate ADD
We note that the worst case impact of a mining tax (with CIL being taxed the entire 26% of
preceding year’s PAT and tax deductibility) would reduce our fair value estimate of CIL to
Rs402/share (20% above the CMP). Further, as discussed above, the eventual impact could
be further muted owing to mix of offsetting levers available. We maintain our ADD rating
and target price of Rs454/share. Our target price is based on 13X FY2013E EPS adjusted for
overburden removal and interest income and implies an EV/EBITDA of 9X on FY2013E
EBITDA (adjusted for overburden removal). CIL currently trades at 8X FY2013E EPS (adjusted)
and 6X FY2013E EBITDA (adjusted).
Key excerpts from the draft Mines and Mineral (Development and Regulation)
Bill, 2011
We highlight below some key excerpts of the draft MMDR Bill relevant to profit sharing for
coal miners.
Profit sharing percentage at 26% of preceding year’s PAT – Chapter VIII, Clause 42.2 (b)
states – “in case of coal and lignite, an amount equal to twenty-six per cent. of the profit
to be called as profit sharing percentage (after deduction of tax paid) of the immediately
preceding financial year from mining related operations in respect of the lease”.
The clause further provides that – “in respect of coal minerals the Central Government
may, after taking into consideration the report and recommendations of the National
Mining Regulatory Authority, by notification, revise the profit sharing percentage, or
specify such other method as may be prescribed for calculation of amount to be paid to
the District Mineral Foundation”.
Our target price is based on 13X FY2013E adjusted-EPS
Computation of CIL's target price
EBITDA (Rs bn) 213
OBR (Rs bn) 32
Adjusted EBITDA (Rs bn) 246
Interest income (Rs bn) 57
PAT (Rs bn) 185
Adjusted PAT (Rs bn) 168
EPS (Rs/share) 29
Adjusted EPS (Rs/share) 27
P/E on FY2013E adjusted PAT (X) 13.0
Value of coal business (Rs bn) 2,180
Cash (Rs bn) 689
Market Cap (Rs bn) 2,870
Target price 454
Notes.
(1) Adjusted EBITDA is calculated after removing the effect OBR adjustment.
(2) Adjusted PAT is calculating after removing the effect of
OBR adjustment and interest income net of taxes.
Source: Kotak Institutional Equities, Kotak Institutional Equities estimates
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