Coal India -Volume expansion - the only key factor : Prabhudas Lilladher,

Coal India (CIL) revised its penalty structure from the earlier 0.01% to anywhere between 1.5 -40%, depending on the level of shortfall. Consequently, CIL would be required to pay 1.5% of the shortfall value if coal delivered is between 65-80% of the Annual contracted quantity (ACQ), while in the worst case scenario, the penalty would be as high as 40% if CIL supplies below 50% of ACQ. Based on our estimate, we don’t see any case for off-take below 80% (65% domestic and 15% imported) in the next couple of years.

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 Increase in penalties not a worrying factor: We don’t think penalty would be a concern to the investors, given its miniscule quantum as also the growth in off-take, which would be enough to meet additional supplies to the power sector. Off-take during April-July’2012 grew by 5% or 7m tonnes to 149m tonnes.
 Concerns on price pooling overdone: We believe that concerns pertaining to import of coal by CIL are overblown in the light of the fact that the price pooling is a mere mechanism to replace the current import done by power utility companies with CIL. Power utilities imported ~45m tonnes of coal during FY12. Price pooling mechanism would enable utility companies to claim pass-through for the increased prices since the average prices (domestic and imported) would be notified by CIL. In the light of such a significant favour to the power sector, we don’t think sector would object to any justified price increase by CIL.
 Only volume performance would matter: Surprisingly, the off-take grew marginally by 1.2% in July 2012 at 36.2m tonnes owing to decline in transportation through MGR and Road, negating the growth in Rail component. Our channel checks suggest that rakes count/day fell to ~150-152 during August so far against an average of 180 in July on account of heavy seasonal rainfall in mine-bearing areas. However, it’s up 12% over the same month last year. We expect 6-7% growth in off-take for the month of August.