Price pooling and revised penalty to come only if it is not earnings
dilutive: The last Board meeting on July 31, 2012 turned inconclusive
owing to apprehensions of the board associated with price pooling and
revised penalty. This clearly vindicates the candid investor-friendly policy
of the Board. We believe that price pooling should be mechanized in a
manner that it does not raise risks for pricing of its coal. However, we were
surprised on the revision of penalty since it was nowhere considered in
PMO’s latest directive. Nevertheless, we are confident that Coal India
would be able to meet its trigger levels of 65%, underscoring the risk of
penalty.
Concerns overdone on FSA deadlock and cut in e-auction volumes:
Management guided that increased supplies to power sector would lessen
its e-auction quantity from the existing 10% to 7% of the total quantity by
the end of FY17. However, we do not see any concerns on E-auction
volumes in the next 2-3 years, given the logistic bottlenecks and FSA
deadlock. Incremental risks to earnings associated with Presidential
directive were alleviated by the Board in the form of putting insignificant
penalties in new model FSAs.
Valuations in attractive territory: Thanks to 6% volume growth and
nominal 3% increase in flat realisations, we expect CIL’s earnings to grow
at a CAGR of 15% during FY12-14, despite sharp increase in the wage cost.
We value the stock at Rs390, P/E of 12.5x FY13E operational EPS of Rs23.1
and cash per share of Rs102. We believe that valuations are justified, given
the sustainable RoEs in excess of 30%.
Risks: Key risks to our recommendation remains. 1) Lower-than-expected
growth in sales volumes and 2) approval of MMDRA act.
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