Coal India (CIL) has signed a memorandum of understanding (MoU) with the ministry of coal for key performance areas for FY12. As per the MoU, CIL?s targeted production has been fixed at 452mt, targeted off-take has been set at 454mt; and R&D, CSR, sustainable development & corporate governance have been made major thrust areas.
Targeted production of 452mt for FY12 is marginally ahead of CIL?s earlier estimate of 447mt. FY11 target output has been maintained at 440mt but we believe CIL is likely to miss this (production from April10-February is at 11 380.6 mt). Citi?s current estimates incorporate production at 431mt in FY11 and 447mt in FY12 and dispatches of 427mt in FY11 and 447mt in FY12. If we incorporate the targeted volumes as per the MOU in our estimates, our FY12 profit would rise by ~3%.
CIL has sought 175 rakes/day in FY12 to meet projected target of 162 rakes/day in FY11 and 157 rakes/day during FY10. It has envisaged an average growth of 13.5% of coal movement through rail to achieve the projected target.
While we remain conservative on volumes and retain our current production growth forecasts of -0.1% in FY11 and +3.7% for FY12, we believe the stock offers value at current levels. The coal price hike announced in February should impact ~32% of its total volumes (excluding e-auction and washed coal) and we expect an overall y-o-y realisation increase of 20% in FY12. Faster clearances and another potential price hike on account of the wage revision due in July could provide further upside. We rate Coal India shares low risk based on our quantitative risk rating system. We believe CIL’s stable margins, mine life visibility, limited risk of coal price downside, low costs and net cash position warrant a Low Risk rating. Downside risks that could prevent the shares from reaching our target price include, but are not limited to: risks of restrictions imposed by regulators related to forest clearance and environmental safeguards.