Unlike Coal India, most other companies will have limited scope to pass on the increase in costs, once the proposed mining bill comes into effect.
Stocks of metals and mining companies have taken a hit after Friday’s announcement of the proposed Mining Bill. The bill seeks companies to set aside 26 per cent of profits earned from their coal mines to compensate the displaced or for social purposes, while non-coal miners are expected to shell out an amount that is equal to their existing royalty.
Although the final bill is yet to be passed in the winter session (in December) of Parliament, the impact could be large for many. However, in terms of share price, analysts do not see much room for further downside. “The share price in most cases have already corrected to the extent of the impact, which is why we do not see more pressure on the prices,” says Eric Martins, who tracks the metal sector at Systematix Shares & Stocks.
Nevertheless, investors need to be watchful as the actual impact will only be known once the finer details emerge after the proposed Bill becomes a law.
BIGGEST HIT: COAL INDIA
Among the mining companies, Coal India could be the worst hit once the new provisions become effective. Estimates suggest that the new provisions could mean a hit on the company’s FY13 estimated profits to around 11 per cent, which assumes that a set-off is available against the existing expenditure on social activities.
However, in the most likely case, the company, as the analysts believe, might not get the set off, in which case the impact on its FY13 estimated earnings per share could be as high as 20 per cent.
Analysts were expecting the company to report an EPS of Rs 26 in FY13. Given the provisions in the new Bill, the same could turn out to be Rs 21 per share. However, its stock price has corrected and factors the impact on earnings — down almost 15 per cent since July 2011, when the markets got to know about the new bill, and is now trading 16 times its FY13 earnings.
The upside risk, however, is that the company will require to increase coal prices by about 10-11 per cent, which if implemented, could nullify the impact. Here, there is scope to hike prices given that Coal India sells most of its coal at a steep discount to international prices. Additionally, there is room for the company to internally adjust its existing social expenses (currently at four per cent of its revenues or 29 per cent core of net profit), which could help partly offset some of the impact.
| NEW MINING BILL: POTENTIAL IMPACT | |||||||
|
Pre-impact (FY13*) | |||||||
Impact on
EPS* (%)
Post-impact (FY13*)
(Rs)
over Sept 29
- 11-20
LESS LEEWAY: IRON ORE
Iron ore miner, Sesa Goa, will also be adversely affected once the new norms come into effect. It pays royalty of almost $4-5 per tonne on iron ore sales. “Due to the impact of new provisions Sesa Goa’s Ebitda (earnings before interest, tax, depreciation and amortisation) may be affected by 14.3 per cent and 15.2 per cent in FY12 and FY13, respectively,” says Kalpesh Makwana, who tracks the company at Quant Global Research.
Taking the new provisions into consideration, analysts have reduced their price target (based on EV/Ebitda of FY13) for the stock to Rs 272, against Rs 307 earlier. Factoring the concerns (and the issues pertaining to the mining ban in Karnataka), its stock has corrected from Rs 290 in early July 2011 to Rs 194. At these levels, analysts see limited downside.
Similarly, for iron ore major NMDC, which is majority owned by the government, the impact could be to the extent of 14 per cent on its FY13 estimated Ebitda. However, unlike many others, given the reduced price target of Rs 209 for the stock, analysts say there is more down side from the current levels of Rs 218.5.
Importantly, in the case of Sesa Goa and NMDC, since their iron ore realisations are linked to international prices, analysts believe there was limited scope for the duo to pass on higher costs through price hikes.
NON-FERROUS
Non-ferrous metal producers like Sterlite Industries are no exceptions. Analysts expect an impact of 9-10 per cent or Rs 3 per share on Sterlite’s FY13 estimated earnings of Rs 29.
This could be largely attributed to its exposure to Hindustan Zinc (a 64.9 per cent subsidiary), which gets 100 per cent of zinc ore requirements from its captive mines attracting about 8.4 per cent royalty.
“The doubling of royalty on zinc, lead and silver mining will impact its FY13 EPS by 12.8 per cent. In comparison, the earnings impact on Hindalco and Nalco will be marginal at one per cent and four per cent, as the current royalty rates on bauxite mining are lower,” says Amit Agarwal, who tracks mining at Religare Capital Markets. Royalty on bauxite is 0.5 per cent, against the eight per cent in the case of Zinc.
As far as Tata Steel, JSW Steel and SAIL are concerned, while they too extract coal and iron ore from captive mines, analysts say, the impact on their consolidated earnings will be 4-6 per cent.
