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Coal India (COAL)
Metals & Mining
Vagaries of labor negotiations. Coal India’s management has initiated the process
of negotiating wages under the National Coal Wage Agreement IX. Initial reports of
demands for revision in wages from 100-500% were met with skepticism, though we
note that the revision in basic wages by 100% implies revision in overall remuneration
by ~32% due to offset of variable dearness allowance that will likely be reset to zero.
We reiterate our BUY rating while maintaining our target price of Rs470/share.
Demand for wage increase should be seen in conjunction of neutralized dearness allowance
Recent media articles indicate that various trade unions of CIL, in their initial demands, have asked
for increase of 100-500% in the basic wage—which translates into a less exaggerated 32%
increase in non-executive wages (excluding gratuity and other benefits). We note that the demand
for revision in basic wages should be seen in conjunction with the reset of inflation-linked dearness
allowance which currently stands at ~50% of basic wages. We further highlight that since the
revision is restricted to non-executive category (accounting for ~75% of total employee cost ), the
overall impact would be further muted.
We currently factor a 25% yoy increase in overall employee wages in FY2012E against
management guidance of 20-30%, though believe that provisions for wage increase in FY2012E
could be more muted with an eventual settlement likely some time away. We discuss the wage
structure and revision process in detail in a subsequent section.
BCCL mines continue to be operational
As per media reports, Jharkhand State Pollution Control Board (JSPCB) has ordered closure of 22
mines of BCCL, a subsidiary of CIL, on grounds that these mines have been operating without
mandatory environmental clearances. CIL management has indicated that these 22 mines produce
~15 mtpa (3.3% of CIL’s estimated production in FY2012E) and complete closure could impact
FY2012E EPS by 7.6% (given that BCCL’s realizations are significantly higher than any other
subsidiary. We, however, note that management has indicated that BCCL has received no such
notice of closure yet from JSPCB and these mines continue to be operational.
Maintain BUY with a target price of Rs470/share
We maintain our BUY rating with target price of Rs470/share. Our target price is based on 13X
FY2013E EPS adjusted for overburden removal and interest income and implies an EV/EBITDA of
9X on FY2013E EBITDA (adjusted for overburden removal). CIL currently trades at 10X FY2013E
EPS (adjusted) and 7X FY2013E EBITDA (adjusted). We note that uncertainty and news flows over
impact of wage revisions and applicability of mining tax could weigh on stock performance in the
near term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India (COAL)
Metals & Mining
Vagaries of labor negotiations. Coal India’s management has initiated the process
of negotiating wages under the National Coal Wage Agreement IX. Initial reports of
demands for revision in wages from 100-500% were met with skepticism, though we
note that the revision in basic wages by 100% implies revision in overall remuneration
by ~32% due to offset of variable dearness allowance that will likely be reset to zero.
We reiterate our BUY rating while maintaining our target price of Rs470/share.
Demand for wage increase should be seen in conjunction of neutralized dearness allowance
Recent media articles indicate that various trade unions of CIL, in their initial demands, have asked
for increase of 100-500% in the basic wage—which translates into a less exaggerated 32%
increase in non-executive wages (excluding gratuity and other benefits). We note that the demand
for revision in basic wages should be seen in conjunction with the reset of inflation-linked dearness
allowance which currently stands at ~50% of basic wages. We further highlight that since the
revision is restricted to non-executive category (accounting for ~75% of total employee cost ), the
overall impact would be further muted.
We currently factor a 25% yoy increase in overall employee wages in FY2012E against
management guidance of 20-30%, though believe that provisions for wage increase in FY2012E
could be more muted with an eventual settlement likely some time away. We discuss the wage
structure and revision process in detail in a subsequent section.
BCCL mines continue to be operational
As per media reports, Jharkhand State Pollution Control Board (JSPCB) has ordered closure of 22
mines of BCCL, a subsidiary of CIL, on grounds that these mines have been operating without
mandatory environmental clearances. CIL management has indicated that these 22 mines produce
~15 mtpa (3.3% of CIL’s estimated production in FY2012E) and complete closure could impact
FY2012E EPS by 7.6% (given that BCCL’s realizations are significantly higher than any other
subsidiary. We, however, note that management has indicated that BCCL has received no such
notice of closure yet from JSPCB and these mines continue to be operational.
Maintain BUY with a target price of Rs470/share
We maintain our BUY rating with target price of Rs470/share. Our target price is based on 13X
FY2013E EPS adjusted for overburden removal and interest income and implies an EV/EBITDA of
9X on FY2013E EBITDA (adjusted for overburden removal). CIL currently trades at 10X FY2013E
EPS (adjusted) and 7X FY2013E EBITDA (adjusted). We note that uncertainty and news flows over
impact of wage revisions and applicability of mining tax could weigh on stock performance in the
near term.
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