Coal India Limited OW: Positive impact from new pricing HSBC Research

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Coal India Limited
OW: Positive impact from new pricing
 Caloric Value-based pricing positive for COAL; our analysis
suggests an average price increase of 9.3% (INR140 per ton)
 INR64bn (27%) additional PBT in FY13 should make up for
INR44bn increase in wages as well as impact of the MMDR bill
 Maintain our estimates and TP of INR415; wait for further
clarity on actual impact over next 1-2 quarters
Event: New pricing effective 1 January 2012. COAL has switched from existing Useful
Heat Value-based system of grading and pricing of non-coking coal to Gross calorific
value (GCV)-based system from 1 January 2012, applicable to all consumers.
Positive impact for COAL, while marginal negative for power utilities - its largest
customer: The company has not provided an exact quantum of impact given the lack of data
on quality of coal delivered. Our analysis based on existing classification suggests (see Ex.1):
 New GCV based prices will result in an average price increase of c9.3%, an INR140 per
ton, and will boost COAL’s net profit by 27% for FY13
 Additional PBT of INR64bn (27%) in FY13 should cover for the additional wage cost
(INR44bn as per HSBC estimate) as well as the additional profit share burden of the
Mines and Minerals (Development and Regulation) Bill “MMDR bill” - INR20-22bn as
per the company were it to be implemented in its current form.
 We note that the price increase for C&D grade coal, (cement, paper and other small
enterprises being main users), is significant (40-60% increase); the E&F category increase,
mostly consumed by the power sector, (-6% -17%) is lower, (non-power 12-28%).
 We estimate the average price hike for power consumers is about cINR100 per ton while
for non-power consumers, it is about cINR400 per ton
 We believe the new pricing will have minimal impact on power sector, at an estimated 6-9
paise per unit, which the power utilities should be able to pass on to the customers.
Conclusion: We will wait for details on quantity dispatched on GCV basis, any discounts
offered, and actual sales over the next 1-2 quarters before updating our forecasts. We
factor an increase of c5.2% in revenue and c15% in net profit for FY13 to account for
increase in wage cost (10% price hike for DEF grade), which may not be required, given
the current increase.
Maintain OW rating and TP of INR415: We value COAL on a combination of DCF
and earnings multiples (Exhibit 2-2C). Our TP implies a PE of 12.1x on FY14e EPS
(current FY13 PE of 10.7x). Downside risks include: lower-than-expected offtake from
logistics constraints or decline in production.