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Signs of easing out of tight spot
Operational performance turnaround, an important trigger
COAL has faced several challenges/disappointments on the policy, administrative and
operational fronts over the last 18 months.
FY13 could be the year of 'operational performance turnaround', largely driven by
leadership enforcement and increased focus to enhance production. While several of
the domestic issues are structural, COAL remains one of the most non-controversial
ways to increase coal production in the system led by focused government action.
The phase of 'tight spot' has led to stock price being influenced by news flows. The CMP
stands atINR333 v/s listing day price of INR342 and high of INR415 on 1 June 2011.
COAL trades at 12x FY13E earnings. It has impressive RoE of 25%+, FY12-14E earnings
CAGR of 17% and FY12E dividend yield of ~3%. Reiterate Buy, with target of INR392.
FY11/12 - in a tight spot: Over the last 18 months, COAL witnessed several
challenges on the policy, operational and administrative fronts. These include
revised norms for environmental/forest clearances, uncertainty on mining tax/
MMDR Act, delays in land acquisition/LAAR Bill, e-auction diversion in October
2011/PMO directive to lower quantum to 7%, commitment on FSA, nonappointment
of a permanent CMD for 18 months, near-flat production for three
consecutive years, wage negotiations, delayed award of washery projects, etc.
These factors coupled with heavy monsoon, workers' strike, evacuation
bottlenecks, etc impacted operational performance. Stringent monitoring of CBI/
CVC/CAG led to excessive focus on set processes and impacted decision making.
FY13 could be year of 'operational performance turnaround': Widening Domestic
coal deficit, inter-ministerial logjam and meaningful implications for the financial
sector triggered a wake-up call, leading to direct intervention of the PMO's office.
Policy stance is now being made more accommodative, with relaxation of CEPI,
removal of 'Go/No Go' concept etc. Near term evacuation bottlenecks are being
addressed through increased wagon allocations. Appointment of a permanent
CMD (Mr S Narsing Rao) is an important step in our view, as focused leadership
could address administrative challenges. Also, the wage negotiation process is
now completed, and we believe that there exist reasonable possibilities of a
compensatory price hike. The passage of the MMDR Act could be a prolonged
exercise, given the strained center-state relationships and limitations of coalition
politics. Thus, a beginning has been made to possibly address several of the
constraints impacting COAL's performance over the past few years.
Strong business fundamentals provide comfort; maintain Buy: We believe that
COAL remains the most non-controversial way to improve coal production in the
system and the company enjoys meaningful operating leverage. This along with
possibility of price review in 1QFY13, accounting cushion in the form of OB
provision and continued discount to international prices provide comfort for
upsides in our view. Our base-case EPS estimate for FY12, which factors in full
impact of wage hikes, but no price revision, stands at INR23. Buy.
Watch terms and signing of FSAs, government action to aid production rampup
While the Prime Minister's Office (PMO) has stipulated that COAL sign fuel supply
agreements (FSAs) with the projects commissioned till December 2011 (~25GW)
by March 2012, the Independent Directors on COAL's Board was not in agreement
with such a commitment.
The Presidential directive to COAL to sign FSAs is an uncomfortable scenario,
given the lack of clarity on actual increase in production at ground level. Also we
understand that the Board is given liberty to decide penalty on new FSA which
provide comfort to COAL.
COAL can also resort to imports in case of shortfall insulating itself from a sizeable
downside in production if any. The cost of such coal will be pass through.
Valuation and view
Assuming production growth of ~7% and price review on notified coal by 12-13%,
we expect COAL to report an EPS of INR28 (growth of 22%) in FY13. For FY14, we
estimate EPS at INR31 (growth of 12%). The impact of mining tax of ~INR4/share
can be set off through OB provisional (as not possible in IFRS). The stock trades at
12x FY13E earnings. It boasts RoE of 25%+, FY12-14E earnings CAGR of 17% and
FY12E dividend yield of ~3%. We reiterate Buy, with a target price of INR392.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Signs of easing out of tight spot
Operational performance turnaround, an important trigger
COAL has faced several challenges/disappointments on the policy, administrative and
operational fronts over the last 18 months.
FY13 could be the year of 'operational performance turnaround', largely driven by
leadership enforcement and increased focus to enhance production. While several of
the domestic issues are structural, COAL remains one of the most non-controversial
ways to increase coal production in the system led by focused government action.
The phase of 'tight spot' has led to stock price being influenced by news flows. The CMP
stands atINR333 v/s listing day price of INR342 and high of INR415 on 1 June 2011.
COAL trades at 12x FY13E earnings. It has impressive RoE of 25%+, FY12-14E earnings
CAGR of 17% and FY12E dividend yield of ~3%. Reiterate Buy, with target of INR392.
FY11/12 - in a tight spot: Over the last 18 months, COAL witnessed several
challenges on the policy, operational and administrative fronts. These include
revised norms for environmental/forest clearances, uncertainty on mining tax/
MMDR Act, delays in land acquisition/LAAR Bill, e-auction diversion in October
2011/PMO directive to lower quantum to 7%, commitment on FSA, nonappointment
of a permanent CMD for 18 months, near-flat production for three
consecutive years, wage negotiations, delayed award of washery projects, etc.
These factors coupled with heavy monsoon, workers' strike, evacuation
bottlenecks, etc impacted operational performance. Stringent monitoring of CBI/
CVC/CAG led to excessive focus on set processes and impacted decision making.
FY13 could be year of 'operational performance turnaround': Widening Domestic
coal deficit, inter-ministerial logjam and meaningful implications for the financial
sector triggered a wake-up call, leading to direct intervention of the PMO's office.
Policy stance is now being made more accommodative, with relaxation of CEPI,
removal of 'Go/No Go' concept etc. Near term evacuation bottlenecks are being
addressed through increased wagon allocations. Appointment of a permanent
CMD (Mr S Narsing Rao) is an important step in our view, as focused leadership
could address administrative challenges. Also, the wage negotiation process is
now completed, and we believe that there exist reasonable possibilities of a
compensatory price hike. The passage of the MMDR Act could be a prolonged
exercise, given the strained center-state relationships and limitations of coalition
politics. Thus, a beginning has been made to possibly address several of the
constraints impacting COAL's performance over the past few years.
Strong business fundamentals provide comfort; maintain Buy: We believe that
COAL remains the most non-controversial way to improve coal production in the
system and the company enjoys meaningful operating leverage. This along with
possibility of price review in 1QFY13, accounting cushion in the form of OB
provision and continued discount to international prices provide comfort for
upsides in our view. Our base-case EPS estimate for FY12, which factors in full
impact of wage hikes, but no price revision, stands at INR23. Buy.
Watch terms and signing of FSAs, government action to aid production rampup
While the Prime Minister's Office (PMO) has stipulated that COAL sign fuel supply
agreements (FSAs) with the projects commissioned till December 2011 (~25GW)
by March 2012, the Independent Directors on COAL's Board was not in agreement
with such a commitment.
The Presidential directive to COAL to sign FSAs is an uncomfortable scenario,
given the lack of clarity on actual increase in production at ground level. Also we
understand that the Board is given liberty to decide penalty on new FSA which
provide comfort to COAL.
COAL can also resort to imports in case of shortfall insulating itself from a sizeable
downside in production if any. The cost of such coal will be pass through.
Valuation and view
Assuming production growth of ~7% and price review on notified coal by 12-13%,
we expect COAL to report an EPS of INR28 (growth of 22%) in FY13. For FY14, we
estimate EPS at INR31 (growth of 12%). The impact of mining tax of ~INR4/share
can be set off through OB provisional (as not possible in IFRS). The stock trades at
12x FY13E earnings. It boasts RoE of 25%+, FY12-14E earnings CAGR of 17% and
FY12E dividend yield of ~3%. We reiterate Buy, with a target price of INR392.
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