Coal India :Clearing ambiguity on e-auction volume cap: Nomura Research

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What's new: e-auction sales to be as per policy, sans additional riders

 In a 1 April notification issued by the Ministry of Coal (MoC), it has been

stated that modalities of e-auction of coal beyond 31 March 2015 would be

as per the system in vogue before the MoC’s directive issued on 27

November 2014.

 A 7 April media report (Business Standard) quotes Coal India’s (CIL’s)

Chairman stating “the coal ministry has issued a directive to revert to the

old system on e-auction volumes.” The media report further states that the

directive means that CIL will now be able to increase its e-auction volumes

to 10% of total sales (standard practice), but first priority will be to supply

coal to the power sector.

Analysis: e-auction volumes to be in line with the NCDP (ie, c.10% of

offtake, potentially tapering to 7% going ahead), no cap

 As per our understanding, MoC’s November 2014 missive effectively

necessitated CIL selling coal via e-auction only after offering the ear-
marked quantum first to its consumers (in some cases to meet the

minimum supply requirements) in the priority sector (essentially, power

projects) with whom it has Fuel Supply Agreements (FSAs).

 The aforesaid MoC notification and comment by CIL’s Chairman indicates

that starting 1 April, CIL can sell coal via e-auction as per the New Coal

Distribution Policy (NCDP) – ie, as was the case prior to the 27 November

2014 directive.

 As per the NCDP, e-auction sales volume can be in the vicinity of 10% of

offtake. As per a subsequent guidance, it was suggested that the quantum

may gradually be tapered to 7% of offtake in case there is need to meet

minimum supply requirements under CIL’s FSAs.

Implications: Clearing ambiguity on any cap on e-auction sales volume

is a positive; maintain Buy

 MoC effectively clarifying that there are no additional cap / riders on sale

of coal via e-auction is comforting. Our forecast trajectory for CIL’s e-
auction sales volume as a proportion of total offtake is 9.2%/8.7%/8.1% in

FY15F/FY16F/17F and thereafter progressively reducing to ~5% of

offtake. In absolute terms, we build in e-auction sales volume of 45-

47mtpa during FY15F-20F.

 At CMP, the stock offers a total potential return of 21.4% (including 5.6%

dividend yield). Maintain Buy; we continue to believe that CIL remains a

good long-haul story (CIL - Long-haul story largely intact, 10 March 2015).

On our FY17F normalised earnings forecast (adding back OB removal

adjustment to EPS and EBITDA + adding surface transport and loading

charges to EBITDA), the stock trades at 10.7x P/E (EPS: INR33.5) and

6.6x EV/EBITDA (13.1x P/E and 8.7x EV/EBITDA on reported earnings).