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Coal India Ltd., domestic supplier of coal to cement manufacturers in
India, has switched to a new pricing regime from Jan 1, 2012, as per
media reports (The Economic Times, 2nd Jan 2012). At this moment this
change is on a trial basis and the final change may take place in
1QFY13F.
The new pricing regime suggests that the notified price of coal would be
directly linked to the Gross Calorific Value (GCV) instead of Useful Heat
Value (UHV), which used to take into account the ash content. UHV is
typically 12%-35% lower than the GCV for grades D,E,F of coal,
according to our Coal India analyst, Anirudh Gangahar. The number of
slabs for coal pricing has increased from 7 to 17 while the prices have
been hiked sharply with erstwhile grades C,D,E,& F witnessing the
highest price increases in the range of 25%-81%.
For cement companies on an average 50%-70% of the coal requirement
is sourced from Coal India on average with India Cements and ACC
being outliers with 30% and 80% of coal sourced domestically
respectively. Cement manufacturers typically use imported coal and
higher grade Coal India coal to fire their kilns while using lower grade
domestic coal in the captive power plants. Thus the larger impact is
expected on the power costs for these companies. Power and fuel costs
contribute approximately 33% of a cement manufacturers’ cost of
production. We expect in the worst case an increase of 50% in the coal
cost for captive power and 15% increase in the coal cost for the kiln.
Thus on a blended basis the cost for cement manufacturers’ could rise
by INR190-INR232/ton, impacting estimated EBITDA/tonne by 18%-
29%, without any corresponding price increase. To negate this cost
increase cement companies would have to hike prices by INR12-14 per
bag, approximately 5%.
With the Jan-Mar quarter being the peak quarter for construction activity
and cement demand, cement manufacturers’ should be able to take a
price hike, in our view, though it may not be the entire quantum required.
We would expect prices to be hiked by about INR5-7 per bag in the
current quarter and the companies to take a hit of about INR85-
100/tonne on profitability in 4QFY12F. The rest of the price hike should
flow through in 1QFY13F.
Within our coverage Shree Cements uses mainly petcoke as fuel and
hence it should see only minimal impact. Shree Cement could even
benefit from the price hike likely to be taken by the industry. We believe
the greatest impact will be on ACC. The table below shows the impact
on the cost/ton and EBITDA/ton for the companies under our coverage.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Ltd., domestic supplier of coal to cement manufacturers in
India, has switched to a new pricing regime from Jan 1, 2012, as per
media reports (The Economic Times, 2nd Jan 2012). At this moment this
change is on a trial basis and the final change may take place in
1QFY13F.
The new pricing regime suggests that the notified price of coal would be
directly linked to the Gross Calorific Value (GCV) instead of Useful Heat
Value (UHV), which used to take into account the ash content. UHV is
typically 12%-35% lower than the GCV for grades D,E,F of coal,
according to our Coal India analyst, Anirudh Gangahar. The number of
slabs for coal pricing has increased from 7 to 17 while the prices have
been hiked sharply with erstwhile grades C,D,E,& F witnessing the
highest price increases in the range of 25%-81%.
For cement companies on an average 50%-70% of the coal requirement
is sourced from Coal India on average with India Cements and ACC
being outliers with 30% and 80% of coal sourced domestically
respectively. Cement manufacturers typically use imported coal and
higher grade Coal India coal to fire their kilns while using lower grade
domestic coal in the captive power plants. Thus the larger impact is
expected on the power costs for these companies. Power and fuel costs
contribute approximately 33% of a cement manufacturers’ cost of
production. We expect in the worst case an increase of 50% in the coal
cost for captive power and 15% increase in the coal cost for the kiln.
Thus on a blended basis the cost for cement manufacturers’ could rise
by INR190-INR232/ton, impacting estimated EBITDA/tonne by 18%-
29%, without any corresponding price increase. To negate this cost
increase cement companies would have to hike prices by INR12-14 per
bag, approximately 5%.
With the Jan-Mar quarter being the peak quarter for construction activity
and cement demand, cement manufacturers’ should be able to take a
price hike, in our view, though it may not be the entire quantum required.
We would expect prices to be hiked by about INR5-7 per bag in the
current quarter and the companies to take a hit of about INR85-
100/tonne on profitability in 4QFY12F. The rest of the price hike should
flow through in 1QFY13F.
Within our coverage Shree Cements uses mainly petcoke as fuel and
hence it should see only minimal impact. Shree Cement could even
benefit from the price hike likely to be taken by the industry. We believe
the greatest impact will be on ACC. The table below shows the impact
on the cost/ton and EBITDA/ton for the companies under our coverage.
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