Coal India :GCV-based pricing switch turns EPS accretive: Nomura research

What’s new: CIL hikes notified coal prices
In its switch to a GCV-based grading and pricing mechanism for non-coking coal from
January 1, 2012, Coal India (CIL) has pushed through a hike in notified (regulated) price
of coal; the new pricing mechanism would be evaluated in the current quarter (1QCY12)
and may be tweaked thereafter. Prima facie, it appears that blended notified price could
effectively rise by 15-20% – CIL’s product mix in context of the GCV-based 17-grade
classification and realization via e-auctions (wherein the basis of setting the reserve price
has been tweaked) would determine the quantum of revenue accretion.
Analysis / implications for CIL – clearly a positive development
1) Although CIL’s transition to the new pricing mechanism from January 2012 was widely
expected, policymakers and management maintained that the switch would largely be
revenue neutral; in this context, the effective price hike as per our first-cut calculations does
appear surprising. 2) ‘Grade slippage’ may be the bogey in realizing sharply higher
revenues; broadly, a margin of safety of two coal grades is built-into the new pricing
structure 3) The base price for the lowest-grade coal (2200GCV) is 10-20% higher than the
lowest price point in the previous pricing regime; further, CIL will now start charging for
providing <3200GCV coal. 4) Ceteris paribus, a 1% increase in blended ASP can increase
CIL’s EPS by ~3%. We maintain our Buy recommendation; on our earnings forecasts for
CIL (under review), the stock trades at 11.5x FY13F P/E and 6.5x FY13F EV/EBITDA.
Negative for consumers, more so for the non-core sectors
1) Overall, notified price for erstwhile Grade C,D coal (~18% of output) has been hiked
sharply, and the price for erstwhile Grade E,F coal (~2/3rd of output) appears to
effectively been raised by at least 4-5%: by our calculations, a 1% hike in notified coal
prices would typically result in 0.25-0.4% rise in power tariff. 2) Price revisions for noncore
sectors are sharply higher for lower GCV coal; the premium over pricing for the core
sector is now 50-60%. 3) The source and GCV of the coal secured from CIL becomes
increasingly important to assess the impact on profitability; IPPs with a revenue model
wherein fuel cost is a pass-through are relatively better placed.
Grade slippage – What is the margin of safety?
While the transition from a pricing mechanism based on seven broad coal grades (from
3200GCV to >6401GCV) to 17 coal grades (from 2200GCV to >7000GCV in slabs of
300GCV) enables a better price discovery, the risk of realizing a lower price on account
of ‘grade slippage,’ i.e. lower-than expected GCV of coal, is also accentuated. A broad
glance over the new pricing structure suggests that CIL has built-in a typical margin of
safety of two coal grades
E-auction reserve price – base premium over notified price lowered
Besides the hike in notified price of non-coking coal, we understand that CIL has lowered
the ‘reserve price’ for sale of coal via the e-auction mechanism. Until 2011, the reserve
price for a particular grade of coal was based on a 30% premium over its notified price.
Going forward, the reserve price for coal grades up to 5500GCV would be based on a
20% premium over its notified price; the reserve price for >5500GCV coal would be the
notified price itself.


Pricing premium for non-core sectors sharply up for low-GCV coal
While the price for >5800GCV coal remains similar for all consumers, pricing premium
for non-core sectors (all excl. power, fertilizer & defence) for lower-GCV coal (erstwhile
Grades E-G) now ranges between 50% and 60%, compared to ~30% previously. Pricing
premium for mid-GCV coal (erstwhile Grades C,D) is marginally higher at ~33% vis-a-vis
~30% previously.

Coal India: New year, new beginnings :: Kotak Securities

Coal India (COAL)
Metals & Mining
New year, new beginnings. Coal India has transitioned to the international grosscalorific
value (GCV) based pricing mechanism—adopting a uniform pricing structure
across all subsidiaries for 17 categories of steam coal (seven previously). The revised
pricing is likely to help to improve realizations, specifically for low realization subsidiaries
such as MCL and SECL, which are expected to contribute ~52% of incremental volume
targets. Maintain ADD with a target price of Rs380.
CIL to move to GCV-based pricing, precise benefit difficult to assess though looks encouraging
The CIL board has approved the internationally accepted GCV-based pricing for coal, moving away
from the decades-old UHV pricing mechanism—furthering its aspirations to market-oriented
pricing. The range of notified prices has increased meaningfully (10% to 30%) across various
categories of coal—though a precise computation of the benefit is difficult in the absence of
company-wise product sales output.
The shift to GCV-based pricing has led to classifying non-coking coal into 17 slabs of 300 kcal
bandwidth compared with seven UHV-based categories previously. Exhibit 2 highlights the
mapping of the old (UHV-based grading) and the new system and Exhibit 4 highlights CIL’s sales
mix across different grades.
Low price, high growth entities such as SECL and MCL likely to benefit from uniform pricing
CIL has also adopted uniform pricing across subsidiaries, from which low-price but high
incremental volume subsidiaries, such as MCL and SECL, are likely to will benefit. We note that
SECL and MCL contribute about half the overall sales volumes and ~52% of incremental targets,
though prices for Grade E and Grade F for these subsidiaries were 44% and 24% respectively
below the revised prices (average across mapped GCV band). CIL also imposed an additional 6%
levy on sales from Eastern Coalfields Ltd (ECL). We note that ECL contributes 12% of total revenue.
Maintain ADD with a target price of Rs380
We maintain our ADD rating with a target price of Rs380. Our target price is based on 11X
FY2013E EPS adjusted for overburden removal and interest income and implies an EV/EBITDA of
7.5X on FY2013E EBITDA (adjusted for overburden removal).The CIL stock has corrected 23% over
the past three months, weighed down by investor concern about (1) the potential impact of the
mining tax, (2) impact of wage revisions due in FY2012, (3) CIL potentially missing on volume
guidance, (4) diversion of e-auction sales and (5) proposal of cross holdings among PSUs. These
concerns are valid and could weigh on sentiment in the near-term but the potential earnings
impact could be muted (in cases such as mining tax and wage revision) or events less likely to pan
out (diversion of e-auction sales).

Query Corner :BL

January 7, 2012:  

I am in possession of Satyam Computer bought at Rs 71 . What is the outlook for this stock? Should I continue to hold this?

T.V.K. Sankaran

Satyam Computer (Rs 67.5): When we consider the long-term chart of Satyam, it is appropriate to ignore the March 2008 peak of Rs 544, and instead restrict our analysis to the period after January 2009, when the scam was revealed.

The stock has key medium-term support at 54 and it is attempting to hold above it since November 2010. Investors can hold the stock as long as this support holds. Breach of this level can see the stock heading lower to Rs 34 or even the January 2009 low of Rs 11.

Medium-term resistance will be at Rs 101 and Rs 128. Long-term view will turn positive only on a close above Rs 128.

Subsequent target is Rs 189.

Please give me your views on Gitanjali Gems and Praj Industries.

Chandrashekhar R

Gitanjali Gems (Rs 308.6): Gitanjali Gems is struggling with the resistance zone between Rs 390 and Rs 400. It recorded a sharp reversal from here in November 2010 and again recently in October 2011.

This level needs to be surpassed before the stock moves to its all-time high of Rs 480. The medium-term downtrend that is in place since the October peak has supports at Rs 300 and Rs 245.

If the stock stabilises above the first support, it can move on to Rs 442 or Rs 531 over the long-term. Stop-loss for investors can be at Rs 246. Next long-term support is between Rs 150 and Rs 170.

Praj Industries (Rs 77.8): Praj Industries suffered a deep loss of over 80 per cent in the 2008 decline, and the recovery in 2009 could not help the stock retrace even one third of this decline.

The stock is moving sideways with a downward bias since the June 2009 peak of Rs 122. It spent the entire 2011 moving between Rs 62 and Rs 96.

Investors can hold the stock with stop at Rs 60. Slide below this level can result in the stock re-testing the March 2009 trough at Rs 45. Resistances for the medium-term will be at Rs 100 and Rs 125.

The zone between Rs 125 and Rs 130 is a key long-term resistance and investors can divest their holdings if the stock fails to cross this hurdle.

Long-term targets if the stock moves above Rs 130 are Rs 160 and Rs 186.

Please explain how put call ratio is calculated and why it should be less than unity in a bullish market.

A.K. Nawabjan

Put-call ratio: Put call ratio is calculated by dividing the volume of put options by the volume of call options. It is a sentiment indicator. In periods of panic, many traders turn bearish and hence buy put options.

The reverse is true in bullish phases. It is generally seen that investors are more optimistic in bull markets and number of call options is greater than the put options. This makes the put call ratio less than unity in bullish phases.

This ratio is also used as a contrarian indicator wherein the interpretation is contrarian to the reading. For instance, a high put call ratio is a bullish indicator since more traders turn bearish near market troughs.

Similarly a low put call ratio is bearish, since a greater number of traders turn bullish at market peaks.

The chief concern with this indicator is that it does not recognise that put and call options require writers of these options who have a contrary opinion to the buyers of these options.

I would like to know the short- and medium-term outlook for Hindalco and Suzlon.

Nilesh Dave

Hindalco (Rs 117.9): Hindalco is moving lower since the peak at Rs 252 recorded in July 2011. This downtrend has not reversed yet and both the short- as well as the medium-term trend in the stock are currently down.

That said, the stock is halting at key medium-term support zone between Rs 100 and Rs 120. Investors can continue to hold the stock with stop at Rs 100. Next long-term support is Rs 68.

Rebound from this level will take the stock higher to Rs 165 or Rs 200 in the upcoming months. Investors with short- to medium-term horizon can exit the stock on reversal from either of these hurdles.

Medium-term view will turn positive only on a close above Rs 200. Next target is Rs 250.

Suzlon Energy (Rs 18.4): There appears to be no end to the downward spiral in Suzlon Energy. The stock is incessantly trudging lower recording lower peaks and troughs. It is currently trading near its life-time low.

Previous long-term support at Rs 33, that is, the trough recorded in March 2009, will now turn into a resistance. Risk-averse investors can divest their holdings at this level and re-enter on a strong weekly close above Rs 33.

Subsequent targets for the months ahead would be Rs 58 and Rs 66. Medium-term view will stay negative as long as the stock trades below Rs 66. Key long-term resistance zone is between Rs 150 and Rs 190.

Please let me know your view on Ador Fontech.

Manoj

Ador Fontech (Rs 89.2): The structural uptrend that commenced in 2009 continues to be in force in Ador Fontech. The correction from its June 2011 peak has retraced only half the gains made in the previous rally.

The stock has supports at Rs 82 and Rs 65 and the second support can act as the stop-loss for investors.

Resistance for the months ahead would be at Rs 110 and Rs 125. Failure to move above the second resistance will imply that the stock can oscillate in the band between Rs 80 and Rs 125 for rest of the year. Area around Rs 150 will continue to be a long-term obstacle.

I would like to buy Shalimar Paints. Please discuss the stock's medium- and long term technicals.

Rajesh Reddy

Shalimar Paints (Rs 315): The medium- as well as long-term trend in the stock is currently down. It is attempting to hold above the support at Rs 300 since last week, but the recovery lacks conviction.

The stock has long-term support in the band between Rs 270 and Rs 330. Investors can buy the stock in this band with stop-loss at Rs 270. Next long-term support is at Rs 220. Resistances for the medium-term are at Rs 490 and Rs 600. Long-term view will turn positive only if the stock goes on to close above Rs 600.

I bought Century Textiles from a long-term perspective. Please let me know if I can continue to hold on to this stock.

Prabhakar

Century Textiles (Rs 222.7): This stock has long-term resistance in the zone between Rs 550 and Rs 600. It formed a double-top in this band and then reversed lower in September 2010. The stock has also penetrated its medium-term trend deciding level at Rs 300. Next long-term support is at Rs 146 and Rs 113.

Investors with low risk appetite can exit the stock at this point and re-enter once it closes above Rs 350. Subsequent targets are Rs 450 and Rs 600. It is hard to envisage a move above Rs 600 just yet.

How to invest in PPF? : BL

Any financial advisor would definitely recommend an investment in PPF (Public Provident Fund) as one of the means to build long-term wealth. You can make investments in this scheme every year (in a maximum of twelve instalments) right from Rs 500 upto Rs 1 lakh. You can make investments either in your name or on behalf of a minor. While the tenure of the PPF account is fixed at 15 years, you can extend it for a further block of five years too. From 2012, interest on the PPF account will be notified by the government at the beginning of every year (April 1). PPF investments are eligible for deduction under Section 80C of the Income-Tax Act. Here's the lowdown on how you can open a PPF account.

Post-offices and banks

Along with instruments such as the MIS and NSC, PPF is part of the small savings scheme run by the post office. Hence, one of the options is to maintain your PPF account in the nearest post-office. Opening the account involves filling up a simple two-page application form and the tendering of cash/cheque for the initial subscription. Your passport size photograph, PAN and address proof are the basic requirements.

In case the PAN is not available, an attested copy of the ration card, voter identity card or passport can be submitted. If you are opening an account on behalf of your minor son or daughter, a copy of his/her birth certificate may also be needed. When you open the account, you will be given a passbook. The passbook needs to be updated for every investment you make and for the interest you receive. You will also get a receipt for every deposit you make which can be shown as a proof of tax-saving investment at your office. This will help reduce the TDS outgo from your salary. Besides post-offices, most public sector banks also help you open PPF accounts with them. The account opening and documentation requirements here are largely the same. 

Online investments

With almost every investment option, be it stocks, mutual funds, fixed deposits or bonds, available at the click of the mouse, can PPF investments be made online too? Well, you cannot if you have an account with the post-office.

But some banks permit online transfers. For example, if you have your PPF account with SBI and your salary/savings account with ICICI Bank, you can log into net banking and add the SBI PPF account as a payee/beneficiary for transfer from your ICICI account. Similarly, money from your Citibank savings account can be transferred to your State Bank of Mysore PPF account.

Moreover, if you have a savings account and the PPF account with the same bank, these two can be linked. In this case, you need not add the PPF account as a third-party beneficiary. You can directly transfer money. Also, you can view the credits to the PPF account online just like how you see your bank statements.

So, if you have savings/PPF account with other private/public sector banks, do a quick check with your banker. In case the bank does not allow online transfers, you can transfer your account to a bank that does. A post-office PPF account too can be transferred to a bank.