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.
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.
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