Media report suggests that “Coal India unions have threatened to go on strike on 10thOctober across all mines, if their demand for a minimum `25000 per worker bonus is not accepted by CIL management”.
Though management has maintained its stand on the bonus issue despite union threat of strike, and has offered `17000 per worker as bonus versus `15000 offered in FY11. Initial assessment of the strike by management indicates volume loss of 0.8-1.0 mn tonne of production.
Our take:
Our initial analysis to this situation suggests that such strike or even a higher bonus wouldn’t have huge material impact on company financials for FY12E. We have expected bonus payments (of c.15% higher) in our employee cost estimates for FY12E and FY13E. We expect if higher bonus of `23500 is paid, it could lead to additional out go of `2149 mn above our original estimates. Such higher bonus could impact FY12E EBIDTA by c.1% (hence immaterial).
But the risk which can be inherited by agreeing to such higher bonus would be its on-going wage hike negotiations. Management could be in dilemma of agreeing to such higher bonus, which if accepted could lead to more stubborn behavior by its union during its ongoing wage hike negotiations.
Valuation and Recommendation
We expect CIL’s revenues to grow at a CAGR of 10% during FY11—FY13E. However we believe that various uncertainties like wage revision, rake shortages, implementation of MMDR bill etc could act as a road block for company’s growth momentum. We have factored in a volume of 445 mn tonnes and 475 mn tonnes for FY12E and FY13E respectively. With recent correction in stock price, we feel partial uncertainties regarding CIL has been priced in. Any further sharp decline in stock price could be used as an entry opportunity. Thus at CMP of `347 we upgrade our rating to HOLD from REDUCE earlier while keeping target price unchanged at `383 which translates to EV/EBIDTA multiple of 8x of its FY13E EBIDTA of `222bn.
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