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India Equity Research Reports, IPO and Stock News
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● Three months after the GoM approval, the cabinet has passed the
MMDR Act; the Act does not offer any surprises. It will be
introduced in the Parliament’s winter session. While it can be
passed some time in CY12, we expect it to take several years. After
all, the profit sharing clause is just one clause in a 100-page bill.
● The other clauses talk about auctioning of mines (will help value
CIL's reserves), time-bound clearances and quicker mine
development (better volume growth). Many clauses are also going to
be controversial, e.g. sale of licenses at market prices. These
clauses will require a lot of debate, agreement from the states,
and thus require government willpower to push through.
● The fate of past bills (Figure 1) shows the likelihood of a
protracted timetable. The fair value impact depends on the year of
implementation and potential price increases in FY16-20 (we have
0% currently).
● If the mining tax is implemented, our EPS estimates would fall by
~14% each year and not 26% (no impact on interest income). And
while the bill doesn’t talk of any offsets for the current CSR, the
7% of PAT spent on welfare can be re-routed. We maintain
OUTPERFORM—the correction provides an opportunity
Cabinet approves the MMDR Act
Three months after the GoM approval, the cabinet has passed the
MMDR Act. This will now be introduced in the winter session of the
Parliament. While theoretically it can be passed some time in CY12,
we believe it might take several years. The profit sharing clause is
after all only one clause in the 100-page bill. Other clauses talk about
auctioning of mines (in which case CIL's reserves will get valued;
currently they don't), time-bound clearances (volume growth better—
their mine life is 150 years), faster land acquisitions and quicker mine
development (the primary purpose of the mining tax). Many of the
clauses are also going to be controversial, e.g. sale of licenses at
market prices and states being forced to approve in a time-bound
manner. Many of these clauses will require a lot of debate, agreement
from the states, and thus need government willpower to push through.
One needs to only look at the past bills introduced (Figure 1) to see
the challenges the government faces.
Figure 1: List of bills pending in the parliament
Bill Introduced Status
Lokpal 1968 Lapsed many times. Now with Standing Committee
Pension fund
regulatory authority
2004 Was introduced in the last Lok Sabha, but lapsed.
New version introduced again
Land acquisition bill 2007 Lapsed in 2009. Approved by cabinet last month
Insurance FDI 2008 Introduced Dec 2008. Lapsed.
Companies Bill 2008 Lapsed. Re-introduced in 2009.
Direct Tax Code 2010 Currently with the standing committee
GST 2011 Cabinet cleared in March, 2011
Source: Government data, Credit Suisse estimates
Further, there are several modalities referenced in the bill that need to
be further fleshed out before it gets implemented, e.g. formation of the
various tribunals and regulatory authorities, calculation (especially for
coal companies) and then distribution of this mining tax.
Implications for Coal India: Glass half full or half empty?
If the mining tax is implemented, our EPS estimates would fall by ~14%
for each year starting the implementation year. This is lower than the
headline rate of 26% because: (1) only the mining profits are taxed and
not the interest/other income earned and (2) the welfare expenses being
incurred (now reported separately) are 7% of PAT—the law doesn’t talk
of an offset, but CIL can re-route these payments to comply.
Sensitivity of our fair value to the year of implementation versus the
price increase (CAGR) taken in FY16-20 is shown in Figure 2. Thus, if
it gets implemented in CY13 and no price increases are taken in
FY16-20, FV falls to Rs387 (Rs450 now). However, a 1.5% CAGR
increase in prices will lead to FV of Rs435.
We believe there is still a long way to go for the bill to be passed and
expect delays at every step. Given the current stalemate in the
Parliament between the ruling party and others, legislative momentum
has slowed visibly, and there is a long list of bills pending approval.
Also, according to the earlier draft, the state government, through the
Gram Sabha/District Council/Panchayat shall identify affected families
and institute a mechanism to ensure benefits are given to such
families. This is operationally difficult to achieve, and implementation
will be a major hurdle for benefits to really trickle down to the locals.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Three months after the GoM approval, the cabinet has passed the
MMDR Act; the Act does not offer any surprises. It will be
introduced in the Parliament’s winter session. While it can be
passed some time in CY12, we expect it to take several years. After
all, the profit sharing clause is just one clause in a 100-page bill.
● The other clauses talk about auctioning of mines (will help value
CIL's reserves), time-bound clearances and quicker mine
development (better volume growth). Many clauses are also going to
be controversial, e.g. sale of licenses at market prices. These
clauses will require a lot of debate, agreement from the states,
and thus require government willpower to push through.
● The fate of past bills (Figure 1) shows the likelihood of a
protracted timetable. The fair value impact depends on the year of
implementation and potential price increases in FY16-20 (we have
0% currently).
● If the mining tax is implemented, our EPS estimates would fall by
~14% each year and not 26% (no impact on interest income). And
while the bill doesn’t talk of any offsets for the current CSR, the
7% of PAT spent on welfare can be re-routed. We maintain
OUTPERFORM—the correction provides an opportunity
Cabinet approves the MMDR Act
Three months after the GoM approval, the cabinet has passed the
MMDR Act. This will now be introduced in the winter session of the
Parliament. While theoretically it can be passed some time in CY12,
we believe it might take several years. The profit sharing clause is
after all only one clause in the 100-page bill. Other clauses talk about
auctioning of mines (in which case CIL's reserves will get valued;
currently they don't), time-bound clearances (volume growth better—
their mine life is 150 years), faster land acquisitions and quicker mine
development (the primary purpose of the mining tax). Many of the
clauses are also going to be controversial, e.g. sale of licenses at
market prices and states being forced to approve in a time-bound
manner. Many of these clauses will require a lot of debate, agreement
from the states, and thus need government willpower to push through.
One needs to only look at the past bills introduced (Figure 1) to see
the challenges the government faces.
Figure 1: List of bills pending in the parliament
Bill Introduced Status
Lokpal 1968 Lapsed many times. Now with Standing Committee
Pension fund
regulatory authority
2004 Was introduced in the last Lok Sabha, but lapsed.
New version introduced again
Land acquisition bill 2007 Lapsed in 2009. Approved by cabinet last month
Insurance FDI 2008 Introduced Dec 2008. Lapsed.
Companies Bill 2008 Lapsed. Re-introduced in 2009.
Direct Tax Code 2010 Currently with the standing committee
GST 2011 Cabinet cleared in March, 2011
Source: Government data, Credit Suisse estimates
Further, there are several modalities referenced in the bill that need to
be further fleshed out before it gets implemented, e.g. formation of the
various tribunals and regulatory authorities, calculation (especially for
coal companies) and then distribution of this mining tax.
Implications for Coal India: Glass half full or half empty?
If the mining tax is implemented, our EPS estimates would fall by ~14%
for each year starting the implementation year. This is lower than the
headline rate of 26% because: (1) only the mining profits are taxed and
not the interest/other income earned and (2) the welfare expenses being
incurred (now reported separately) are 7% of PAT—the law doesn’t talk
of an offset, but CIL can re-route these payments to comply.
Sensitivity of our fair value to the year of implementation versus the
price increase (CAGR) taken in FY16-20 is shown in Figure 2. Thus, if
it gets implemented in CY13 and no price increases are taken in
FY16-20, FV falls to Rs387 (Rs450 now). However, a 1.5% CAGR
increase in prices will lead to FV of Rs435.
We believe there is still a long way to go for the bill to be passed and
expect delays at every step. Given the current stalemate in the
Parliament between the ruling party and others, legislative momentum
has slowed visibly, and there is a long list of bills pending approval.
Also, according to the earlier draft, the state government, through the
Gram Sabha/District Council/Panchayat shall identify affected families
and institute a mechanism to ensure benefits are given to such
families. This is operationally difficult to achieve, and implementation
will be a major hurdle for benefits to really trickle down to the locals.
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