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Coal India
Neutral
COAL.BO, COAL IN
Media reports indicate price increases by Coal India-
Running preliminary sensitivities
• Media reports indicate price increases, though there is not enough clarity
on quantum/grade: As per various media reports (The Hindu), Coal India is in
the process of implementing price increases. While we spoke to the company,
and it confirmed that there have been price increases, it declined to
confirm a) the quantum, or b) over what grades of coal. The media report
indicated that the price increases have been for customers other than power,
fertilizers and defense, essentially for all customers who sell their end
products on market-driven pricing and the increase being 30% (we estimate
these sectors should be 22-24% of COAL’s volumes). We have no
confirmation on this from the company. We have consistently highlighted in
our research on Coal India the possibility of the company implementing
differential pricing for coal. If COAL has actually implemented differential
coal pricing, it would be negative for cement, steel, sponge and aluminum
companies, which would be the most impacted, as it would increase their
linkage coal costs by the quantum of the hike), and very positive for COAL as
it would de-link non-power customers from linkage coal prices, and instead
mark them to spot prices . Total coal costs increase for customers would be
lower given that most of these companies are currently buying a part of their
requirements from the e-auction market/import.
• Some sensitivity analysis of COAL’s price increases: Assuming there has
been a 30% price increase for the non-regulated customers (such a price increase
on coking coal would take prices to Rs8,450, still significantly below imported
coking coal which admittedly is a superior grade), it would impact nearly 22%
of COAL’s volumes, or 98MT on FY12 sales. Deducting thee-auction
volumes from this would mean price increases on roughly 42MT. COAL’s
prices vary sharply across grades and mines, and we assume an average
price of Rs1300/MT for these 42MT, which would increase by Rs390/MT,
increasing EBITDA on a full year basis by 11% for FY12E (if the talked
about price increase is on an immediate basis, it would impact FY11E as
well, given that the increase would be available for one month) and EPS by
9%. The earnings impact would be much lower (we estimate only 6%) if the
price increase is only on Grades A&B, which are 7% of volumes. We would
highlight though there is not enough clarity on this as of now and the above
is only a preliminary sensitivity analysis.
• What of a general price increase across all notified coal? Some media reports
have also talked about a potential increase in notified coal prices (which goes to
power sector) of as much as 15%. We find such an increase difficult to believe
given the inflation feed through. Assuming such an increase were to take place,
revenues would be Rs53bn higher (current JPM FY12E EBITDA is Rs151bn).
We believe a notified coal price increase would essentially be to offset the
wage provisions required to be made from July, and a proposed 15%
increase could provide for 29% increase in wage costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India
Neutral
COAL.BO, COAL IN
Media reports indicate price increases by Coal India-
Running preliminary sensitivities
• Media reports indicate price increases, though there is not enough clarity
on quantum/grade: As per various media reports (The Hindu), Coal India is in
the process of implementing price increases. While we spoke to the company,
and it confirmed that there have been price increases, it declined to
confirm a) the quantum, or b) over what grades of coal. The media report
indicated that the price increases have been for customers other than power,
fertilizers and defense, essentially for all customers who sell their end
products on market-driven pricing and the increase being 30% (we estimate
these sectors should be 22-24% of COAL’s volumes). We have no
confirmation on this from the company. We have consistently highlighted in
our research on Coal India the possibility of the company implementing
differential pricing for coal. If COAL has actually implemented differential
coal pricing, it would be negative for cement, steel, sponge and aluminum
companies, which would be the most impacted, as it would increase their
linkage coal costs by the quantum of the hike), and very positive for COAL as
it would de-link non-power customers from linkage coal prices, and instead
mark them to spot prices . Total coal costs increase for customers would be
lower given that most of these companies are currently buying a part of their
requirements from the e-auction market/import.
• Some sensitivity analysis of COAL’s price increases: Assuming there has
been a 30% price increase for the non-regulated customers (such a price increase
on coking coal would take prices to Rs8,450, still significantly below imported
coking coal which admittedly is a superior grade), it would impact nearly 22%
of COAL’s volumes, or 98MT on FY12 sales. Deducting thee-auction
volumes from this would mean price increases on roughly 42MT. COAL’s
prices vary sharply across grades and mines, and we assume an average
price of Rs1300/MT for these 42MT, which would increase by Rs390/MT,
increasing EBITDA on a full year basis by 11% for FY12E (if the talked
about price increase is on an immediate basis, it would impact FY11E as
well, given that the increase would be available for one month) and EPS by
9%. The earnings impact would be much lower (we estimate only 6%) if the
price increase is only on Grades A&B, which are 7% of volumes. We would
highlight though there is not enough clarity on this as of now and the above
is only a preliminary sensitivity analysis.
• What of a general price increase across all notified coal? Some media reports
have also talked about a potential increase in notified coal prices (which goes to
power sector) of as much as 15%. We find such an increase difficult to believe
given the inflation feed through. Assuming such an increase were to take place,
revenues would be Rs53bn higher (current JPM FY12E EBITDA is Rs151bn).
We believe a notified coal price increase would essentially be to offset the
wage provisions required to be made from July, and a proposed 15%
increase could provide for 29% increase in wage costs.
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