Coal India rated ‘Hold’ by Jefferies, says coking coal price hike a positive

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Updated: January 23, 2017 4:39:30 AM

Price revision by BCCL and CCL, its subsidiaries, could increase CIL’s ASP by 3-3.5% and partly ease margin pressure

coal indiaCIL’s subsidiary BCCL has raised coking coal (5.5% of CIL volumes, 61% of CIL’s coking coal volumes) prices by over 20%. (Reuters)

We believe coking coal price hike by CIL’s subsidiaries  BCCL and CCL could boost CIL’s ASP by 3-3.5%.The coking price hike should partly ease margin pressure. E-auction prices should also improve from Q2 lows, but wage cost increase would continue to weigh on CIL’s earnings.

BCCL, CCL revise coking coal prices: CIL’s subsidiary BCCL has raised coking coal (5.5% of CIL volumes, 61% of CIL’s coking coal volumes) prices by over 20%. Prices of steel grade coal (1.3% of BCCL’s volumes) has been linked to washed coking coal prices, which in turn has been set at discount to import parity and would be reset on a quarterly basis. Implied hike in washed coking coal and steel grade coal is over 1.9x. CIL’s subsidiary, CCL has also raised coking coal prices (4% of CIL’s volumes, 38% of coking coal volumes).

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Price hike could lift blended realisation by ~3.5%: CIL expects price hike at (a) BCCL to add R29.9 bn to revenue and (b) CCL to add R2.2 bn to revenue in FY18 based on target volumes. We estimate ASP increase at BCCL could be ~30-32% and at CCL could be ~1.5-2%. Impact on blended ASP should be ~3.5% based on our volume estimate. We expect washed coking coal/steel grade coal prices to be revised lower in coming quarters, given that Australian coking coal (HCC) spot is $187/t vs $260/t used for setting these prices. BCCL has set a floor price of R11,500/ton for prime coking coal prices.

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Only 10% of BCCL’s offtake is to steel sector: Coking coal accounts for 10% of CIL’s volume, but met coal accounts for only 13.5% of coking coal volumes. SAIL (BCCL’s main customer in steel) purchased coal under MoU, prices for which were revised periodically. 80% of BCCL’s volume is sold to power utilities. There could be some impact on demand in this segment due to the price hike. At CCL, only 0.6% of its volumes is sold to the steel sector.

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We lift our washed coal ASP and FSA ASP estimates factoring the coking coal price revision. We assume washed coking coal prices to be reset lower. Our FY17-18E EPS increases by 4.5-11%.

Valuation/risks: Post estimate changes, our DCF based PT rises to R310 (7.6x Ebitda ex OBR). Upside risks: higher FSA prices, higher e-auction prices. Downside risks: slower volume growth, lower e-auction prices and no FSA price hikes.

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Highlights of price revision

At BCCL, prices of washery grade coal (98.7% of volumes) have been revised higher by around 20%.
Prices of steel grade coal and Direct feed coal has been linked to washed coking coal prices, which in turn has been linked to import parity prices. Prices of washed prime coking coal has been set at R13500/ton, to be revised on a quarterly basis

Price of washed medium volatile coking coal (MVC) has been set at R11,500/ton, but would be revised on a quarterly basis.

 

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