UBS Investment Research
Coal India
K ey takeaways from call with management
Event: labour strike called off after higher bonus settlement
1) The labour unions of Coal India (CIL) have called off a proposed three-day
strike (in early November) after the company agreed to a higher bonus payout of
Rs21,000/worker (vs. CIL’s offer of Rs17,000 and union demand of Rs23,000).
The higher bonus will cost cUS$30m. 2) Wage negotiations are expected to
conclude by 31 December although there could be delays. We have factored in a
wage increase of cRs45bn in FY12 (+25% YoY), though CIL expects wage
provision of cRs23bn in FY12 (provision only from Q2).
Impact: production loss will be avoided; rake availability to increase
1) The strike cancellation is positive, in our view, as production loss will be
avoided. A recent strike (10 October) led to production loss of c1mt. 2) We believe
the recent crisis in the power sector will ensure more coordination between the
power/coal/railway ministries and lead to an increase in rake availability to CIL.
The mining ban at Karnataka has also led to an increase in rakes. CIL has said rake
availability has increased to 180 rakes/day.
Action: structural theme intact; recent correction overdone
1) CIL sold 200mt in H1 FY12 (12% miss)—it needs to sell c254mt in H2 to meet
its guidance of 454mt (sold 225mt in H2 FY11—53% of FY11 sales). 2) CIL has
said its e-auction sales quota of c50mt for FY12 will not reduce despite diverting
c4mt from e-auction in October to the power sector. 3) Worst-case impact from the
proposed mining tax is c19% on our PAT estimate. However, there could be major
changes in the bill. We forecast FY12/FY13 ASP of Rs1,344/1,400 and volumes of
452/473mt.
Valuation: maintain Buy rating and price target of Rs400
We continue to value CIL on 15x FY13E PE.
Key takeaways from the management call
We have factored in higher wages:
— We have estimated incremental wages of cRs45bn in FY12 (+25%
YoY) though CIL expects wages to increase on an annualised basis by
Rs30bn—FY12 provision will only be cRs23bn i.e. provision only
from Q2 FY12.
CIL missed production/sales by c10%/12% in H1 FY12:
— CIL is confident of achieving the full-year targets by ramping up
production and sales in H2 FY12. In FY11, H2 production/sales
accounted for 57%/53% of full-year production/sales. CIL
management is confident of achieving 447mt/454mt of full-year
production/sales.
— Even if there is some downside to sales in FY12, we have factored in
significantly higher wage costs and do not expect significant downside
to our earnings. 1% lower sales volume would lead to 2% lower
earnings.
Rake availability has increased:
— We spoke to management and understand that the current rake
availability has increased to 180 rakes/day. The mining ban in
Karnataka has also led to an increase in rakes available for CIL.
— CIL received c166 rakes per day in Q1 FY12 and less than 160 rakes
in Q2 FY12.
Details of CIL’s Production/Sales miss in H1 FY12
CIL missed its production target by c10% or 19mt in H1 FY12 primarily due
to heavy rains (please refer to rainfall data in Table 4).
— In FY11, CIL produced c57% (245mt) of its full-year production
(431mt) in H2. To meet the lower end of its production guidance for
FY12 (447mt), CIL would need to produce 270mt in H2 (vs. 245mt in
the same period last year).
CIL missed its sales target by c12% or 26mt in H1 FY12 primarily due to the
heavy rains.
— In FY11, CIL sold c53% (225mt) of its full-year sales (424mt) in H2.
To meet the lower end of its sales guidance for FY12 (454mt), CIL
would need to sell 254mt in H2 (vs. 225mt in the same period last
year).
— We have assumed FY12 sales of c452mt.
Coal India
Coal India is the largest coal company in the world (primarily thermal coal). The
government owns 90% of the company. It sells its entire output (415Mt in
FY10) in the domestic market. Coal India sells coal at a significant discount (55-
60%) to international coal prices.
Statement of Risk
Coal India is a public sector enterprise and hence, may not be able to raise coal
prices in line with input costs (given inflation concerns), negatively impacting
earnings. Coal India is expanding capacity significantly; any delay in capacity is
likely to impact earnings.
Coal India
K ey takeaways from call with management
Event: labour strike called off after higher bonus settlement
1) The labour unions of Coal India (CIL) have called off a proposed three-day
strike (in early November) after the company agreed to a higher bonus payout of
Rs21,000/worker (vs. CIL’s offer of Rs17,000 and union demand of Rs23,000).
The higher bonus will cost cUS$30m. 2) Wage negotiations are expected to
conclude by 31 December although there could be delays. We have factored in a
wage increase of cRs45bn in FY12 (+25% YoY), though CIL expects wage
provision of cRs23bn in FY12 (provision only from Q2).
Impact: production loss will be avoided; rake availability to increase
1) The strike cancellation is positive, in our view, as production loss will be
avoided. A recent strike (10 October) led to production loss of c1mt. 2) We believe
the recent crisis in the power sector will ensure more coordination between the
power/coal/railway ministries and lead to an increase in rake availability to CIL.
The mining ban at Karnataka has also led to an increase in rakes. CIL has said rake
availability has increased to 180 rakes/day.
Action: structural theme intact; recent correction overdone
1) CIL sold 200mt in H1 FY12 (12% miss)—it needs to sell c254mt in H2 to meet
its guidance of 454mt (sold 225mt in H2 FY11—53% of FY11 sales). 2) CIL has
said its e-auction sales quota of c50mt for FY12 will not reduce despite diverting
c4mt from e-auction in October to the power sector. 3) Worst-case impact from the
proposed mining tax is c19% on our PAT estimate. However, there could be major
changes in the bill. We forecast FY12/FY13 ASP of Rs1,344/1,400 and volumes of
452/473mt.
Valuation: maintain Buy rating and price target of Rs400
We continue to value CIL on 15x FY13E PE.
Key takeaways from the management call
We have factored in higher wages:
— We have estimated incremental wages of cRs45bn in FY12 (+25%
YoY) though CIL expects wages to increase on an annualised basis by
Rs30bn—FY12 provision will only be cRs23bn i.e. provision only
from Q2 FY12.
CIL missed production/sales by c10%/12% in H1 FY12:
— CIL is confident of achieving the full-year targets by ramping up
production and sales in H2 FY12. In FY11, H2 production/sales
accounted for 57%/53% of full-year production/sales. CIL
management is confident of achieving 447mt/454mt of full-year
production/sales.
— Even if there is some downside to sales in FY12, we have factored in
significantly higher wage costs and do not expect significant downside
to our earnings. 1% lower sales volume would lead to 2% lower
earnings.
Rake availability has increased:
— We spoke to management and understand that the current rake
availability has increased to 180 rakes/day. The mining ban in
Karnataka has also led to an increase in rakes available for CIL.
— CIL received c166 rakes per day in Q1 FY12 and less than 160 rakes
in Q2 FY12.
Details of CIL’s Production/Sales miss in H1 FY12
CIL missed its production target by c10% or 19mt in H1 FY12 primarily due
to heavy rains (please refer to rainfall data in Table 4).
— In FY11, CIL produced c57% (245mt) of its full-year production
(431mt) in H2. To meet the lower end of its production guidance for
FY12 (447mt), CIL would need to produce 270mt in H2 (vs. 245mt in
the same period last year).
CIL missed its sales target by c12% or 26mt in H1 FY12 primarily due to the
heavy rains.
— In FY11, CIL sold c53% (225mt) of its full-year sales (424mt) in H2.
To meet the lower end of its sales guidance for FY12 (454mt), CIL
would need to sell 254mt in H2 (vs. 225mt in the same period last
year).
— We have assumed FY12 sales of c452mt.
Coal India
Coal India is the largest coal company in the world (primarily thermal coal). The
government owns 90% of the company. It sells its entire output (415Mt in
FY10) in the domestic market. Coal India sells coal at a significant discount (55-
60%) to international coal prices.
Statement of Risk
Coal India is a public sector enterprise and hence, may not be able to raise coal
prices in line with input costs (given inflation concerns), negatively impacting
earnings. Coal India is expanding capacity significantly; any delay in capacity is
likely to impact earnings.
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