A day after the Prime Minister’s Office (PMO) tightened the noose around Coal India (CIL), asking it to meet full supply commitments made to power sector companies, experts say the company is left with no option but to ramp up production or face penalties. Since it is difficult to increase production immediately, Coal India will have to resort to imports. Acting chairman Zohra Chatterjee, also additional secretary in the coal ministry, said imports will be resorted to. Analysts say these will cost the company dearly unless it raises prices.
The announcement has more than offset the positive sentiment after a good December quarter, reported on Monday. It also adds to the headwinds Coal India has been facing for the past six months on account of uncertainty on the quantity of wage rises to workers and fear the government trying to use the company’s huge cash to fulfil its divestment objectives. While the recent decision to shift to a new pricing policy based on gross calorific value (GCV) would have helped mitigate the impact of wage rises, it had to roll back the move due to pressure.
For now, with more supplies to be made at fuel supply agreement (FSA) prices and with wage revisions due, clarity on price rises to be undertaken during the first quarter of 2012-13 is crucial for profitability. Until clarity emerges, the stock may remain under pressure or at best range-bound, reckon analysts. At Rs 320 (down six per cent on Thursday), the stock is trading 20 per cent lower than its six-month high (closing price) of Rs 397.85.
| FY13: PROFITABILITY UNDER STRESS | |||
| In Rs crore | Q3FY12 | FY2012E | FY2013E |
| Net sales | 15,349.30 | 59,273.20 | 64,338.40 |
| % chg y-o-y | 20.90 | 12.65 | 7.87 |
| Ebitda | 4,547.40 | 1,733.00 | 16,954.30 |
| Ebitda(%) | 29.60 | 29.20 | 26.40 |
| Net profit | 4,037.80 | 14,646.60 | 14,950.90 |
| % chg y-o-y | 53.80 | 34.70 | 2.07 |
| EPS (Rs) | 6.39 | 23.19 | 23.67 |
| PE (x) |
– | ||
FSA: Earnings’ impact
CIL had last signed FSAs in March 2009 for 304.9 mt of coal, with a penalty trigger at 90 per cent. And, after that, new power capacities have been added, for which it does not have only supply compulsion. However, in the latest announcement, CIL will have to sign an FSA committing a minimum annual quantity of 80 per cent of total requirement (83 mt) of all power plants commissioned up to December. Below 80 per cent, it will have to pay a penalty. Likewise, for power plants’ commissioning up to March 2015.
| COAL SUPPLY PROJECTIONS FOR POWER SECTOR | ||||
| MW | FSA/LoA (MT) | Penalty trigger (%) | Quantity at penalty level (MT) | |
| FSAs up to March 2009 | 304.8 | 90 | 274.3 | |
| FY10 COD with LoAs | 5,395 | 24.1 | 80 | 19.3 |
| FY11 COD with LoAs | 6,205 | 24.7 | 80 | 19.6 |
| FY12 COD with LoAs (up to Jan 2012) | 8,222 | 33.9 | 80 | 27.1 |
| FY12 expected COD Jan 12-March 12 | 17,000 | 35.9 | 80 | 28.0 |
| FY13 expected COD | 17,000 | 70.0 | 80 | 56.0 |
| Requirement in FY 13 | 397.3* | |||
| Further LoAs issued after FY13 | 65,467 | 235.2 | 80 | 188.1 |
| Total requirement | 585.5 | |||
| COD: Commercial Operation Declaration LoA: Letter of Assurance FSA: Fuel Supply Agreement * Taken half of it for FY13, assuming commissioning averaged out Source: Emkay Global Financial Services | ||||
Analysts at CLSA say if implemented, this move would increase the risk for Coal India’s earnings, as there might be a requirement to shift some volume of coal from e-auctions (fetches higher realisation) for supply under FSAs. Analysts at Emkay Global estimate additional coal of 123 mt will have to be supplied in FY13 by Coal India to the power sector at an 80 per cent penalty trigger (see table). The requirement would rise if further Letters of Assurance (LoAs) are issued for projects to be commissioned after 2013. For now, at existing production levels, analysts feel it can spare 30 mt while another 20 mt can be met from a five per cent ramp-up in production during 2012-13. The balance 73 mt will, thus, have to be met through costlier imports.
So, analysts expect CIL’s operating profit to be impacted by 12 per cent, in an optimum scenario, if a third of e-auction quantity is diverted to meet FSA commitments coupled with four per cent price rises. However, a price rise of 7.5 per cent may help mitigate the losses.
Price rises crucial
In this context, clarity on price rises remain crucial for Coal India’s profitability. The company, though, has made provisions of Rs 780 crore towards wage arrears during the previous two quarters, sufficient for a 24 per cent increase in wage costs. Analysts at Motilal Oswal Securities feel wage costs will rise 31 per cent. They are estimating a wage increase of Rs 5,000 crore for 2012-13 and wage provision of Rs 1,200 crore (versus Rs 800 crore by the management) for the March 2012 quarter. Analysts at Citi observe a one per cent change in wage costs impacts Coal India’s profit after tax by 1.3 per cent.
The option is to significantly increase coal production. However, such a measure will take time to materialise. “The only solution to the fuel issues is mid- to long-term in nature – which is to increase production. But we do not believe it is possible in 2012-13,” notes Amit Golchha, analyst with Emkay Global Financial Services.
Q3: Good performance
Meanwhile, Coal India saw flat production and dispatches during the December quarter). The price rises undertaken during February 2011, as well as a lower proportion of e-auctions with the power sector in October, helped realisations in the quarter improve 21 per cent year-on-year to Rs 1,392 a tonne, and boosted overall revenue and profit.
While the December quarter performance was helped by better realisations, analysts at CLSA say that the recent flip-flop in shifting to a GCV-based pricing regime has raised question about Coal India’s freedom to determine prices. Thus, the price rise in 2012-13 could be a key determinant of valuations of the stock. Till then, it could remain range-bound.
