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).
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).
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