Coal India (CIL) has revised penalty structure for new FSAs upwards to 1.5-40% (earlier 0.01%), which has potential adverse impact of 3-4% on FY14E EPS. Decision on price pooling for imported coal has been deferred. We believe concerns on potential hit to the company of high cost imported coal are overdone since power producers have in-principle agreed to price pooling. Pending clarity, we retain our estimates and ‘BUY’ with TP of INR410.
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Penalty structure revised upwards
CIL’s board has revised upwards the penalty structure for new FSAs from 0.01% proposed earlier to the 1.5-40.0% band in the following manner: (i) no penalty for supply of at least 80% of ACQ; and (ii) penalty of 1.5%, 5%, 10%, 20% and 40% of value of shortfall quantity for supply levels of 65-80%, 60-65%, 55-60%, 50-55% and less than 50% of ACQ, respectively.
Potential adverse impact of ~3-4% on FY14E EPS
We estimate a potential adverse impact of 3-4% on FY14E EPS from the revised penalty structure (applicable penalty expected to be 10%). In this case, we are assuming that CIL will sell 10mt additional (from inventory/increased production) from our base case sales volume of 450mt and 474mt for FY13E and FY14E, respectively. We also assume loss of incentive of INR6,500mn due to diversion of 15mtpa of volume from old FSAs to new FSAs.
Outlook and valuations: Manageable risks; maintain ‘BUY’
While the revised penalty structure is potentially adverse for CIL, we see conditions/caveats in the new FSAs which will reduce actual incidence. We believe concerns on potential impact on CIL of imported coal are overdone. In our view, the end game will be in the company ramping up production significantly from FY14 onwards to resolve the various issues. At this stage, we await details and retain our ‘BUY/SO’ recommendation/rating with a price target of INR410.
Regards,
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