COMPANY QUICK COMMENT
Our analysis of a press release by the MoC and statements by Coal India CMD on the decision to divert e-auction coal
to the power sector suggests [1] It is likely to be a one-off arrangement to offer Oct-11 quota of e-auction coal (4mt)
for supply against existing FSAs at ‘notified’ prices, [2] clause stating e-auction amount to remain ~10% of total
sales, “as per policy” is the silver lining, and [3] Ceteris paribus, impact on FY12F EPS would be neutral (best case), -
2.5% (worst case). We place our earnings estimates for CIL under review; structural growth story remains intact;
maintain BUY
EVENT – A press release by the MoC, statements by Coal India’s CMD
Further to statements made by Power and Coal Ministry officials yesterday towards ensuring greater availability of coal for the
power sector, in a press release, the Ministry of Coal (MoC) stated – [1] MoC has decided to offer some of the e-auction coal
to the sector during the current month. [2] This will be made available against already concluded Fuel Supply Agreements
(FSA) on ‘as is where basis’. The power utilities will be expected to make their own arrangements for lifting and transportation,
[3] As per policy, 10% of the total available quantity of coal is kept for e-auction. This step is expected to help the power sector
overcome the temporary shortage of coal.
On this issue, in an interview with a TV channel (CNBC TV-18), Mr. N.C. Jha (CMD of CIL) stated – [1] e-auction coal quota
for October (4mt), is being made available to the power sector; power producers are expected to make arrangements for
lifting/transporting this coal from CIL’s stockyards, [2] The 4mt on offer will be within the supply required to be made under the
existing FSAs; CIL has not met supply required under FSAs in 1HFY12. [3] Overall proportion of e-auction sale for FY12 will
remain above 10%. That is, more quantity of coal would be sold via e-auction during the remainder of FY12; the quantum of
4mt on offer not lifted by the power sector (if any), would also be sold via e-auction, [4] repetition of this arrangement is
unlikely; this has been necessitated due to acute shortfall in coal production/supply in August/September on account of the
unusually excessive monsoon.
ANALYSIS
The MoC press release and Chairman’s statement largely provides the key parameters – tenure, quantity and pricing – to
assess the financial impact of this diktat.
Tenure / quantity – A one-off arrangement for diverting one month e-auction quota of 4mt
As was indicated by our channel checks (refer to our previous note on CIL “Proposed diversion of e-auction coal – prima facie
negative, quantum uncertain”, dated October 13, 2011), the diktat on e-auction coal diversion is for a short period (October
2011) and likely a one-off arrangement for supply of 4mt of coal.
Pricing – Should be as per ‘notified’ prices, as supply is against existing FSAs
While the pricing is not explicitly mentioned, as it is clearly indicated that the 4mt coal on offer is within the supply required
under the FSAs (“made available against already concluded FSAs” as per the MoC press release), it is implied that the sale
would be on notified prices (and not e-auction price).
Silver lining – e-auction quantity to remain ~10% of total sales for FY12 (as per policy)
As stated in the MoC press release and corroborated by the CMD of CIL, the proportion of e-auction sales to total sales for the
full year (FY12) would remain ~10%, as per the policy (NCDP) – this statement is critical as it suggests expected e-auction
revenues in 2HFY12 would potentially not be impacted; revenues would be realized in 5 months (Nov-Mar) instead of 6
months (Oct-Mar). Moreover, any amount of the 4mt not lifted by the power sector in October would also be sold via e-auction.
IMPLICATIONS
Ceteris paribus, best case = EPS neutral, worst case = 2.5% hit to FY12F EPS
Going by the press release and the CMD’s clarifications, the diversion of 4mt coal earmarked for e-auction in October should
be revenue & EPS neutral (ceteris paribus) – it simply implies realization of potential e-auction revenues for October during
Nov-11 to Mar-12.
However, if we consider that the 4mt e-auction coal diverted to the power sector is not recouped in the remainder of 2HFY12,
that is, e-auction sales in Nov-11 to Mar-12 do not commensurately rise to meet our assumed proportion of e-auction sales to
total sales (pegged at 11.5%), the dent to our FY12F EPS for CIL would be 2.2-2.5%.
Will this ‘arrangement’ be a ‘one-off’?
While the regulatory risk for Coal India cannot be underestimated, in our assessment, this appears to be a ‘one-off’ measure
for FY12. However, it does set a precedent for subsequent years if an unusually excessive monsoon takes a toll on coal
production/offtake in the July-Sep quarter; of course, we need to note that the workers’ strike related to ‘Telangana’, which has
virtually halted production at Singareni Collieries (SCCL) this year, is most likely a one-off.
We place our earning estimates for CIL under review…
Arguably, the need for diversion of e-auction coal has arisen on account of shortage in coal supply by CIL under its FSAs in
1HFY12. Based on our FY12F production and offtake forecast for CIL (~447mt/~453mt, respectively), the required production /
offtake rate in 2HFY12 is ~1.5mt/day and ~1.4mt/day (~190 rakes/day), respectively – the run rate appears difficult to achieve.
Together with the potential risk to e-auction revenues and shortfall in target production/offtake, we see a potential downside to
our earnings forecast for CIL.
…structural growth story remains intact; maintain BUY
We remain focused on CIL’s capacity to make up for the shortfall in 1HFY12 production/offtake (following the sharper-thanexpected monsoon-related slowdown in production / dispatches) and potential magnitude of wage revision – key risks to our
FY12F/13F earnings forecast for the company. CIL’s structural growth story remains intact; magnitude and labor strikes
relating to the non-executive wage revision continue to be the key overhang on the stock. Maintain BUY; stock trades at 12.3x
FY13F P/E.
Our analysis of a press release by the MoC and statements by Coal India CMD on the decision to divert e-auction coal
to the power sector suggests [1] It is likely to be a one-off arrangement to offer Oct-11 quota of e-auction coal (4mt)
for supply against existing FSAs at ‘notified’ prices, [2] clause stating e-auction amount to remain ~10% of total
sales, “as per policy” is the silver lining, and [3] Ceteris paribus, impact on FY12F EPS would be neutral (best case), -
2.5% (worst case). We place our earnings estimates for CIL under review; structural growth story remains intact;
maintain BUY
EVENT – A press release by the MoC, statements by Coal India’s CMD
Further to statements made by Power and Coal Ministry officials yesterday towards ensuring greater availability of coal for the
power sector, in a press release, the Ministry of Coal (MoC) stated – [1] MoC has decided to offer some of the e-auction coal
to the sector during the current month. [2] This will be made available against already concluded Fuel Supply Agreements
(FSA) on ‘as is where basis’. The power utilities will be expected to make their own arrangements for lifting and transportation,
[3] As per policy, 10% of the total available quantity of coal is kept for e-auction. This step is expected to help the power sector
overcome the temporary shortage of coal.
On this issue, in an interview with a TV channel (CNBC TV-18), Mr. N.C. Jha (CMD of CIL) stated – [1] e-auction coal quota
for October (4mt), is being made available to the power sector; power producers are expected to make arrangements for
lifting/transporting this coal from CIL’s stockyards, [2] The 4mt on offer will be within the supply required to be made under the
existing FSAs; CIL has not met supply required under FSAs in 1HFY12. [3] Overall proportion of e-auction sale for FY12 will
remain above 10%. That is, more quantity of coal would be sold via e-auction during the remainder of FY12; the quantum of
4mt on offer not lifted by the power sector (if any), would also be sold via e-auction, [4] repetition of this arrangement is
unlikely; this has been necessitated due to acute shortfall in coal production/supply in August/September on account of the
unusually excessive monsoon.
ANALYSIS
The MoC press release and Chairman’s statement largely provides the key parameters – tenure, quantity and pricing – to
assess the financial impact of this diktat.
Tenure / quantity – A one-off arrangement for diverting one month e-auction quota of 4mt
As was indicated by our channel checks (refer to our previous note on CIL “Proposed diversion of e-auction coal – prima facie
negative, quantum uncertain”, dated October 13, 2011), the diktat on e-auction coal diversion is for a short period (October
2011) and likely a one-off arrangement for supply of 4mt of coal.
Pricing – Should be as per ‘notified’ prices, as supply is against existing FSAs
While the pricing is not explicitly mentioned, as it is clearly indicated that the 4mt coal on offer is within the supply required
under the FSAs (“made available against already concluded FSAs” as per the MoC press release), it is implied that the sale
would be on notified prices (and not e-auction price).
Silver lining – e-auction quantity to remain ~10% of total sales for FY12 (as per policy)
As stated in the MoC press release and corroborated by the CMD of CIL, the proportion of e-auction sales to total sales for the
full year (FY12) would remain ~10%, as per the policy (NCDP) – this statement is critical as it suggests expected e-auction
revenues in 2HFY12 would potentially not be impacted; revenues would be realized in 5 months (Nov-Mar) instead of 6
months (Oct-Mar). Moreover, any amount of the 4mt not lifted by the power sector in October would also be sold via e-auction.
IMPLICATIONS
Ceteris paribus, best case = EPS neutral, worst case = 2.5% hit to FY12F EPS
Going by the press release and the CMD’s clarifications, the diversion of 4mt coal earmarked for e-auction in October should
be revenue & EPS neutral (ceteris paribus) – it simply implies realization of potential e-auction revenues for October during
Nov-11 to Mar-12.
However, if we consider that the 4mt e-auction coal diverted to the power sector is not recouped in the remainder of 2HFY12,
that is, e-auction sales in Nov-11 to Mar-12 do not commensurately rise to meet our assumed proportion of e-auction sales to
total sales (pegged at 11.5%), the dent to our FY12F EPS for CIL would be 2.2-2.5%.
Will this ‘arrangement’ be a ‘one-off’?
While the regulatory risk for Coal India cannot be underestimated, in our assessment, this appears to be a ‘one-off’ measure
for FY12. However, it does set a precedent for subsequent years if an unusually excessive monsoon takes a toll on coal
production/offtake in the July-Sep quarter; of course, we need to note that the workers’ strike related to ‘Telangana’, which has
virtually halted production at Singareni Collieries (SCCL) this year, is most likely a one-off.
We place our earning estimates for CIL under review…
Arguably, the need for diversion of e-auction coal has arisen on account of shortage in coal supply by CIL under its FSAs in
1HFY12. Based on our FY12F production and offtake forecast for CIL (~447mt/~453mt, respectively), the required production /
offtake rate in 2HFY12 is ~1.5mt/day and ~1.4mt/day (~190 rakes/day), respectively – the run rate appears difficult to achieve.
Together with the potential risk to e-auction revenues and shortfall in target production/offtake, we see a potential downside to
our earnings forecast for CIL.
…structural growth story remains intact; maintain BUY
We remain focused on CIL’s capacity to make up for the shortfall in 1HFY12 production/offtake (following the sharper-thanexpected monsoon-related slowdown in production / dispatches) and potential magnitude of wage revision – key risks to our
FY12F/13F earnings forecast for the company. CIL’s structural growth story remains intact; magnitude and labor strikes
relating to the non-executive wage revision continue to be the key overhang on the stock. Maintain BUY; stock trades at 12.3x
FY13F P/E.
No comments:
Post a Comment