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E-auction noise- As of now, we do not see any impact on COAL, but others
to be impacted: The latest update on e-auction is that NTPC (state utility)
would get priority, but the pricing would be based on e-auction discovered
prices. This, as of now, means minimal impact on COAL (we estimate eauction
coal sales would account for 26% of EBITDA based on Q1 ASP,
even as it accounts for 11-12% of volumes). The coal situation in the country
has worsened, given rains have impacted COAL’s production/off-take, the
strike at the Singareni Collieries, and increasing demand. The continued focus
on e-auction coal, in our view, highlights the limelight that COAL finds
itself under as being the most profitable entity in the value chain from
COAL to NTPC to SEB (all essentially state owned).
….But multiple headwinds building up for COAL, Remain UW: The stock
is down 19% from May-11 peak levels. We see downside risks to COAL’s
454MT off-take targets, given the disruptions seen in Aug/Sept. We estimate
rake requirements of 195-230 rakes assuming 175 days in H2 with the variance
being the amount of coal moved by other modes increasing or not compared to
Q1 levels. Rake availability as of Q1 stood at 168. We expect no easy
resolution to the wage negotiations (as per the chairman, the recent one-day
strike could have cost as much as Rs1.2bn and 1MT in lost production). We see
upside risks to our and the Street’s 24% wage increase expectation and
more importantly see the negotiation being a contentious process this time.
We believe the 26% profit-sharing clause of MMDR remains an overhang.
Price hikes for coal would come, but will they be enough?: We expect COAL
to increase prices once there is clarity on wage cost increases, with the non
regulated sectors likely to face a higher increase. We estimate a 1% wage
increase requiring 0.4% increase in non market-linked coal prices (~80% of total
volumes). 24-45% wage inflation would require a 10-18% blended increase.
Key risk is higher dividend payout: COAL’s cash on books stood at Rs515bn
(Rs82/share). Against the backdrop of the Government’s fiscal deficit and
the delayed FPO program so far, we see a ‘one-time dividend’ as the key
upside risk to our UW thesis. Any stake purchase by COAL in companies
in other sectors/share buybacks would not be so positive in our view
Coal situation worsens, impacting everyone
The coal availability has worsened in the country, given the rains which have
impacted COAL India’s off-take and production (we estimate off-take at 94MT in
the September quarter, down 5% y/y). The ongoing strike at other state-owned miner
Singareni Coal mines have also impacted coal production. Media reports (Business
Standard) have highlighted the impact of the lower coal production on power
generation, with the power ministry pegging the generation loss at 4bn units between
April and Sept this year on lower coal availability. Many utilities have been
running at critical coal stocks. Media reports (CNBC) earlier in the day
indicated that the e-auction coal sold by COAL India (we estimate 48MT) could
possibly be made available to the power sector. Later in the day, the Coal Minister
was quoted as saying that NTPC would be given priority to access coal from the eauction,
but would be at the e-auction discovered prices. This, as of now, rests
concerns on the possible impact on COAL India as there should not be any
reduction in COAL India’s e-auction-related revenues. We estimate that the
differential E auction coal revenues should account for 26% of EBITDA.
The problems for CPPs could increase: Any prioritizing of coal for the Utilities
(NTPC) would have an adverse impact on the other sectors like cement,
aluminum and also merchant power plants which have been sourcing coal from
e-auction to meet a part of their requirements. We believe the current severe
tightness in domestic coal availability has been exacerbated by one-off factors
like large rainfall, and the strike at the other state-owned miner in South India.
We are also not clear as to how would NTPC evacuate the coal from pit heads
and, more importantly, how the e-auction coal prices would be passed through.
However, if the proposed prioritizing is successful, we see the long-term impact
for the non utility sectors in India like cement, aluminum, as it would be forced
to rely on the import markets, and with many of them hundreds of kms away
from the port, inland transportation cost would be prohibitive. Cement
companies source between 30% and 50% from the e-auction while the
aluminum companies source between 30% and 60% from e-auction.
Additionally, we expect COAL to increase prices once there is more visibility on
the wage hike negotiations (possibly early next year), with the non regulated
sectors (like cement, steel, aluminum) again seeing large increases, similar to the
price increases seen earlier in the year.
Remain UW on COAL
Our earnings estimates and PT are under review as we wait for more details on
the quantum of wage provisioning that COAL is building in. We see multiple
headwinds ahead for COAL in terms of:
a) 454MT off-take target under risk: While volumes should pick up from
Q2 levels, we see the 454 MT target under risk, given the sharp miss
seen in Q2. While production should pick up pace from Nov, we believe
peak rake availability required is between 195 and 230 per day, which
in our view is stretched.
b) Wage hike could surprise on the upside, negotiations could be a
contentious process: As the recent one-day strike highlighted (for
higher bonuses), the negotiation process could be contentious. Also
while we and the Street have build in 24%, actual wage hike could be
higher.
c) While coal prices should increase, whether the entire cost increase
would be passed through in the current inflationary environment
remains difficult to see. While COAL is likely to undertake another
differentiated price increase, we believe given the fact that it is the most
profitable entity in the COAL-NTPC-SEB value chain, further margin
increases driven by price increases look difficult.
d) Little visibility on next year’s volume growth: While JPM/Street
estimates are built around 5.5-6% volume growth, there is little
visibility on this as of now.
One-time dividend key upside risk in our view
With the equity sale program getting delayed, we do not rule out a large one-time
dividend from COAL India (90% owned by Government). COAL's cash balance
stands at a massive Rs515bn (Rs82/share) and free cash flow generation remains
strong. A large one-time dividend would be a strong positive for COAL in our view.
Risks to rating and PT
We value the company at 7x FY13E EV/EBITDA, to arrive at our Sep-12 PT of
Rs345 (from Rs340 prices). Our multiple is at a premium to global peers. Given
CIL’s earnings visibility over the next three years, we believe an FY13E multiple is
appropriate. Key risks are: a) one-time dividend; b) higher-than-expected volumes;
b) large notified coal price increases; and d) lower cost inflation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
E-auction noise- As of now, we do not see any impact on COAL, but others
to be impacted: The latest update on e-auction is that NTPC (state utility)
would get priority, but the pricing would be based on e-auction discovered
prices. This, as of now, means minimal impact on COAL (we estimate eauction
coal sales would account for 26% of EBITDA based on Q1 ASP,
even as it accounts for 11-12% of volumes). The coal situation in the country
has worsened, given rains have impacted COAL’s production/off-take, the
strike at the Singareni Collieries, and increasing demand. The continued focus
on e-auction coal, in our view, highlights the limelight that COAL finds
itself under as being the most profitable entity in the value chain from
COAL to NTPC to SEB (all essentially state owned).
….But multiple headwinds building up for COAL, Remain UW: The stock
is down 19% from May-11 peak levels. We see downside risks to COAL’s
454MT off-take targets, given the disruptions seen in Aug/Sept. We estimate
rake requirements of 195-230 rakes assuming 175 days in H2 with the variance
being the amount of coal moved by other modes increasing or not compared to
Q1 levels. Rake availability as of Q1 stood at 168. We expect no easy
resolution to the wage negotiations (as per the chairman, the recent one-day
strike could have cost as much as Rs1.2bn and 1MT in lost production). We see
upside risks to our and the Street’s 24% wage increase expectation and
more importantly see the negotiation being a contentious process this time.
We believe the 26% profit-sharing clause of MMDR remains an overhang.
Price hikes for coal would come, but will they be enough?: We expect COAL
to increase prices once there is clarity on wage cost increases, with the non
regulated sectors likely to face a higher increase. We estimate a 1% wage
increase requiring 0.4% increase in non market-linked coal prices (~80% of total
volumes). 24-45% wage inflation would require a 10-18% blended increase.
Key risk is higher dividend payout: COAL’s cash on books stood at Rs515bn
(Rs82/share). Against the backdrop of the Government’s fiscal deficit and
the delayed FPO program so far, we see a ‘one-time dividend’ as the key
upside risk to our UW thesis. Any stake purchase by COAL in companies
in other sectors/share buybacks would not be so positive in our view
Coal situation worsens, impacting everyone
The coal availability has worsened in the country, given the rains which have
impacted COAL India’s off-take and production (we estimate off-take at 94MT in
the September quarter, down 5% y/y). The ongoing strike at other state-owned miner
Singareni Coal mines have also impacted coal production. Media reports (Business
Standard) have highlighted the impact of the lower coal production on power
generation, with the power ministry pegging the generation loss at 4bn units between
April and Sept this year on lower coal availability. Many utilities have been
running at critical coal stocks. Media reports (CNBC) earlier in the day
indicated that the e-auction coal sold by COAL India (we estimate 48MT) could
possibly be made available to the power sector. Later in the day, the Coal Minister
was quoted as saying that NTPC would be given priority to access coal from the eauction,
but would be at the e-auction discovered prices. This, as of now, rests
concerns on the possible impact on COAL India as there should not be any
reduction in COAL India’s e-auction-related revenues. We estimate that the
differential E auction coal revenues should account for 26% of EBITDA.
The problems for CPPs could increase: Any prioritizing of coal for the Utilities
(NTPC) would have an adverse impact on the other sectors like cement,
aluminum and also merchant power plants which have been sourcing coal from
e-auction to meet a part of their requirements. We believe the current severe
tightness in domestic coal availability has been exacerbated by one-off factors
like large rainfall, and the strike at the other state-owned miner in South India.
We are also not clear as to how would NTPC evacuate the coal from pit heads
and, more importantly, how the e-auction coal prices would be passed through.
However, if the proposed prioritizing is successful, we see the long-term impact
for the non utility sectors in India like cement, aluminum, as it would be forced
to rely on the import markets, and with many of them hundreds of kms away
from the port, inland transportation cost would be prohibitive. Cement
companies source between 30% and 50% from the e-auction while the
aluminum companies source between 30% and 60% from e-auction.
Additionally, we expect COAL to increase prices once there is more visibility on
the wage hike negotiations (possibly early next year), with the non regulated
sectors (like cement, steel, aluminum) again seeing large increases, similar to the
price increases seen earlier in the year.
Remain UW on COAL
Our earnings estimates and PT are under review as we wait for more details on
the quantum of wage provisioning that COAL is building in. We see multiple
headwinds ahead for COAL in terms of:
a) 454MT off-take target under risk: While volumes should pick up from
Q2 levels, we see the 454 MT target under risk, given the sharp miss
seen in Q2. While production should pick up pace from Nov, we believe
peak rake availability required is between 195 and 230 per day, which
in our view is stretched.
b) Wage hike could surprise on the upside, negotiations could be a
contentious process: As the recent one-day strike highlighted (for
higher bonuses), the negotiation process could be contentious. Also
while we and the Street have build in 24%, actual wage hike could be
higher.
c) While coal prices should increase, whether the entire cost increase
would be passed through in the current inflationary environment
remains difficult to see. While COAL is likely to undertake another
differentiated price increase, we believe given the fact that it is the most
profitable entity in the COAL-NTPC-SEB value chain, further margin
increases driven by price increases look difficult.
d) Little visibility on next year’s volume growth: While JPM/Street
estimates are built around 5.5-6% volume growth, there is little
visibility on this as of now.
One-time dividend key upside risk in our view
With the equity sale program getting delayed, we do not rule out a large one-time
dividend from COAL India (90% owned by Government). COAL's cash balance
stands at a massive Rs515bn (Rs82/share) and free cash flow generation remains
strong. A large one-time dividend would be a strong positive for COAL in our view.
Risks to rating and PT
We value the company at 7x FY13E EV/EBITDA, to arrive at our Sep-12 PT of
Rs345 (from Rs340 prices). Our multiple is at a premium to global peers. Given
CIL’s earnings visibility over the next three years, we believe an FY13E multiple is
appropriate. Key risks are: a) one-time dividend; b) higher-than-expected volumes;
b) large notified coal price increases; and d) lower cost inflation.
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