Coal India - Banking on increased production; company update; Buy ::Edelweiss (pdf link)

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Coal India (COAL IN, INR 324, Buy)

Coal India (CIL) sees minimal coal imports resulting from the new FSAs and no hit from the resulting higher costs. Review of full impact of wage costs to decide need for price hike in the next 1-2 months. Production target for FY13 is 463mt (our estimate: 440mt) and the company expects faster environmental approvals going forward. We maintain our ‘BUY’ recommendation with price target of INR430/share (stock is trading at FY13 P/E of ~11x). 

New FSAs to be met with minimal imports with no hit to CIL

CIL will endeavour to meet commitments of new FSAs (80% threshold) largely by incremental coal production of 20-25mt and partial diversion of e-Auction coal. With delays in power plants, CIL expects minimal coal imports (we expect 77mt by FY13E). CIL expects no hit related to imported coal cost to itself. Power Ministry is to decide whether this hit is to be borne by only importing coal consumers or all consumers. Existing FSA quantity is unlikely to be reduced and diverted to new FSA customers.      

Price hike decision post review of costs and e-Auction policy

CIL expects total impact of wage increase at INR65bn, consisting of annual hike of INR40bn (our est.: INR51bn) and one-time actuarial valuation of INR25bn (our est. : INR 15bn). CIL to review coal pricing post final impact assessment. Further, CIL may also consider price hike for any diversion of e-Auction coal to FSA customers. e-Auction proportion could reduce to 7% by FY17, if required.  

Outlook and valuations: Production growth critical; maintain ‘BUY’

CIL has been accorded environmental clearances for 3-4 projects and expects continued progress on this front to enable higher production. We continue to believe in the structural pricing power of CIL. Our FY13 employee cost increase is higher than company guidance. We maintain our estimates and ‘BUY/SO’ recommendation with price target of INR430/share (stock trades at FY13 P/E of ~11x).

Coal India - Banking on increased production; company update; Buy