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What’s new: GCV-based pricing structure to be reviewed on Jan 20
In a news report by Business Line (citing Press Trust of India dated January 18, 2012),
Mr. Sripakash Jaiswal (Union Minister of Coal) is quoted stating, “this [new pricing
mechanism] will be reviewed on January 20. We will come out with a solution within a
week of the review, so that there should not be overall price increase or the increase
should not be more than required, if it is necessary for certain grades [of coal[. Price
fixed by them (Coal India), in my opinion, is more than required.” Furthermore, the
report cites Mr. Jaiswal clarifying that the new GCV-based pricing of coal will not be
annulled, but the variation in prices would be reviewed. Our channel checks corroborate
that (1) the review is based on the representation by IPPs (including NTPC) via the
Ministry of Power (MoP) against the hike built into the coal prices notified under the new
17-grade structure and apprehension on the declared GCV of coal measured by the new
apparatus, and (2) broad direction from the Ministry of Coal (MoC) was to keep the new
pricing structure ‘largely revenue neutral’ for Coal India (CIL).
What's the ground status on adoption of new pricing mechanism?
Our discussion with IPPs indicates [1] provisional billing of coal dispatched in the past
fortnight has been made as per the new pricing structure, but not by all CIL subsidiaries,
[2] instead of a grade slippage, declared GCV of coal under the new GCV structure has
moved up in some cases, thus attracting a sharply higher price point, and [3] IPPs have
limited say in joint sampling of coal being done at the loading point. Our discussion with
CIL indicates that since January 1, 2012, coal is being dispatched and billed as per the
new pricing mechanism across all subsidiaries apart from ECL (where the switchover
has been put in abeyance until mid-February on a ‘request’ by the Calcutta High Court).
Analysis: review was expected, nominal price hike still probable
In our January 3 note “GCV-based pricing switch turns EPS accretive”, we mentioned –
[1] price discovery based on 17 grades vs. 7 grades (in the previous mechanism) will
typically lead to higher blended realization, [2] base price for the lowest-grade coal
(2200GCV) is 10-20% higher than the lowest price point in the previous pricing regime,
[3] CIL appears to have built-in a typical margin of safety of two grade slippage in the
new pricing structure, and [4] assuming no grade slippage, blended notified price could
effectively rise by 15-20%. Further, our calculations suggest that [a] if we assume
across-the-board slippage of one coal grade under the new calorie-meter based
measurement of GCV, blended notified price would effectively rise by ~7%, and [b] if we
were to keep the coal prices for the core sectors (power, fertilizer & defence) at the
minimum level under the previous grading structure, the effective hike in blended notified
prices would still be about 5-7%.
Implications – Maintain BUY, we see an upside risk on realizations
Inferences from our recent interactions with IPPs and policymakers suggests that a
nominal hike in notified coal price would probably be ‘acceptable’; accordingly, we
maintain that CIL would eventually be able to push through a hike in notified prices for
FY13. CIL’s 1HFY12 blended realization has surprised us positively (Rs1382/ton vs. our
FY12 forecast of Rs1377/ton); our current earnings forecast for CIL (under review) builds
in a 3.4% hike in blended realization for FY13F. Ceteris paribus, a 1% increase in
blended ASP could increase CIL’s EPS by ~3%, based on our calculations. We maintain
our Buy recommendation; on our FY13 earnings forecasts for CIL (under review), the
stock trades at 12.5x FY13F P/E and 7.4x FY13F EV/EBITDA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s new: GCV-based pricing structure to be reviewed on Jan 20
In a news report by Business Line (citing Press Trust of India dated January 18, 2012),
Mr. Sripakash Jaiswal (Union Minister of Coal) is quoted stating, “this [new pricing
mechanism] will be reviewed on January 20. We will come out with a solution within a
week of the review, so that there should not be overall price increase or the increase
should not be more than required, if it is necessary for certain grades [of coal[. Price
fixed by them (Coal India), in my opinion, is more than required.” Furthermore, the
report cites Mr. Jaiswal clarifying that the new GCV-based pricing of coal will not be
annulled, but the variation in prices would be reviewed. Our channel checks corroborate
that (1) the review is based on the representation by IPPs (including NTPC) via the
Ministry of Power (MoP) against the hike built into the coal prices notified under the new
17-grade structure and apprehension on the declared GCV of coal measured by the new
apparatus, and (2) broad direction from the Ministry of Coal (MoC) was to keep the new
pricing structure ‘largely revenue neutral’ for Coal India (CIL).
What's the ground status on adoption of new pricing mechanism?
Our discussion with IPPs indicates [1] provisional billing of coal dispatched in the past
fortnight has been made as per the new pricing structure, but not by all CIL subsidiaries,
[2] instead of a grade slippage, declared GCV of coal under the new GCV structure has
moved up in some cases, thus attracting a sharply higher price point, and [3] IPPs have
limited say in joint sampling of coal being done at the loading point. Our discussion with
CIL indicates that since January 1, 2012, coal is being dispatched and billed as per the
new pricing mechanism across all subsidiaries apart from ECL (where the switchover
has been put in abeyance until mid-February on a ‘request’ by the Calcutta High Court).
Analysis: review was expected, nominal price hike still probable
In our January 3 note “GCV-based pricing switch turns EPS accretive”, we mentioned –
[1] price discovery based on 17 grades vs. 7 grades (in the previous mechanism) will
typically lead to higher blended realization, [2] base price for the lowest-grade coal
(2200GCV) is 10-20% higher than the lowest price point in the previous pricing regime,
[3] CIL appears to have built-in a typical margin of safety of two grade slippage in the
new pricing structure, and [4] assuming no grade slippage, blended notified price could
effectively rise by 15-20%. Further, our calculations suggest that [a] if we assume
across-the-board slippage of one coal grade under the new calorie-meter based
measurement of GCV, blended notified price would effectively rise by ~7%, and [b] if we
were to keep the coal prices for the core sectors (power, fertilizer & defence) at the
minimum level under the previous grading structure, the effective hike in blended notified
prices would still be about 5-7%.
Implications – Maintain BUY, we see an upside risk on realizations
Inferences from our recent interactions with IPPs and policymakers suggests that a
nominal hike in notified coal price would probably be ‘acceptable’; accordingly, we
maintain that CIL would eventually be able to push through a hike in notified prices for
FY13. CIL’s 1HFY12 blended realization has surprised us positively (Rs1382/ton vs. our
FY12 forecast of Rs1377/ton); our current earnings forecast for CIL (under review) builds
in a 3.4% hike in blended realization for FY13F. Ceteris paribus, a 1% increase in
blended ASP could increase CIL’s EPS by ~3%, based on our calculations. We maintain
our Buy recommendation; on our FY13 earnings forecasts for CIL (under review), the
stock trades at 12.5x FY13F P/E and 7.4x FY13F EV/EBITDA.
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