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Coal India Underweight
COAL.BO, COAL IN
FY12 production target cut not surprising, but lack of
clarity on critical issues remains a negative
Now production targeted at 440MT in FY12: COAL has un-officially (media
reports in Hindu, Bloomberg) revised down FY12 production target to 440MT
from the earlier 447MT (start of the year it stood at 452MT). We do not find
this surprising, given the delayed ramp up in Oct and Nov post rains. The latest
production estimate from COAL is still higher than JPM forecast of 427MT.
We see downside to COAL’s 440MT production target given it implies monthly
production run rate of 48MT, which is very high in our view. Offtake targets
have not been revised down, which we find surprising.
Admittedly the above are factored in, however lack of clarity on 2 critical
issues negative: We are already in December, and there is still no official
communication on FY13 production and offtake targets. FY13 would be the
first year of the 12th Plan period. JPM estimate is 5.5% on production and
offtake for FY13E. The other critical area remains how the up-streaming of
cash from COAL to the Government takes place. The amount, as per various
public comments, appears to be Rs150bn (25% of JPME FY12E end net cash).
However, the mode is yet to be decided. The 3 options in our view are- a)
Dividend; b) Stock buyback and c) Cross Holdings.
Price increases likely, but watch out for regulatory changes: A price hike is
likely some time over the next 3-6 months as wage negotiations get finalized.
Similar to last year, the non regulated sectors like aluminum, cement, could
likely face a larger price increase. While this could lead to short term
strength in the stock price, we believe potential regulatory changes in
India's coal sector need to be closely watched. Deficit is increasing sharply
and imports are not an optimum solution. Opening up of the coal sector, in terms
of allowing 3rd party coal sales is, in our view, a very direct risk to COAL’s
earnings stream, especially if it starts competing with e-auction coal sales. It
remains to be seen whether the decision makers in the Government see a
bigger/wider role for COAL in meeting India’s coal deficit (asking it to acquire
overseas assets, taking the role of importer). The final impact of the proposed
MMDR Bill would flow through (26% profit sharing) in terms of price increase
and cost absorption by COAL, also remains to be seen. None of the above are
near term events, but likely next year. However, how these events play out
would have implications on long term earnings trend for COAL and
subsequently valuation multiples.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Underweight
COAL.BO, COAL IN
FY12 production target cut not surprising, but lack of
clarity on critical issues remains a negative
Now production targeted at 440MT in FY12: COAL has un-officially (media
reports in Hindu, Bloomberg) revised down FY12 production target to 440MT
from the earlier 447MT (start of the year it stood at 452MT). We do not find
this surprising, given the delayed ramp up in Oct and Nov post rains. The latest
production estimate from COAL is still higher than JPM forecast of 427MT.
We see downside to COAL’s 440MT production target given it implies monthly
production run rate of 48MT, which is very high in our view. Offtake targets
have not been revised down, which we find surprising.
Admittedly the above are factored in, however lack of clarity on 2 critical
issues negative: We are already in December, and there is still no official
communication on FY13 production and offtake targets. FY13 would be the
first year of the 12th Plan period. JPM estimate is 5.5% on production and
offtake for FY13E. The other critical area remains how the up-streaming of
cash from COAL to the Government takes place. The amount, as per various
public comments, appears to be Rs150bn (25% of JPME FY12E end net cash).
However, the mode is yet to be decided. The 3 options in our view are- a)
Dividend; b) Stock buyback and c) Cross Holdings.
Price increases likely, but watch out for regulatory changes: A price hike is
likely some time over the next 3-6 months as wage negotiations get finalized.
Similar to last year, the non regulated sectors like aluminum, cement, could
likely face a larger price increase. While this could lead to short term
strength in the stock price, we believe potential regulatory changes in
India's coal sector need to be closely watched. Deficit is increasing sharply
and imports are not an optimum solution. Opening up of the coal sector, in terms
of allowing 3rd party coal sales is, in our view, a very direct risk to COAL’s
earnings stream, especially if it starts competing with e-auction coal sales. It
remains to be seen whether the decision makers in the Government see a
bigger/wider role for COAL in meeting India’s coal deficit (asking it to acquire
overseas assets, taking the role of importer). The final impact of the proposed
MMDR Bill would flow through (26% profit sharing) in terms of price increase
and cost absorption by COAL, also remains to be seen. None of the above are
near term events, but likely next year. However, how these events play out
would have implications on long term earnings trend for COAL and
subsequently valuation multiples.
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