Proposed coal linkage auction should boost Coal India’s profit: Nomura

The ministry of coal (MoC) has issued an approach paper on auction of coal linkages for non-regulated sectors and sought comments from stakeholders/public on the methodology proposed therein by June 11. We believe that proposed methodology for non-regulated sector, wherein the floor price would be CIL’s notified coal price for the non-regulated sector, clearly implies that the price discovery mechanism would boost realisation.

Assuming rupee-denominated seaborne thermal coal prices does not drop substantially from current levels, realisation for 10% of CIL’s offtake may rise by 20-25% (distance of plant to port/mine and prospects of a 5-year fixed price linkage coal would also impact price discovery). Ceteris paribus, as a 1% rise in blended realisation of CIL translates into a 3% accretion in EPS, accordingly, CIL’s earnings may rise by 7-10%.

Our FY17 earnings estimates for CIL build-in a 6.1% y-o-y uptick in blended realisation. We continue to expect that CIL will raise notified coal prices for the power sector as well over the next 12-18 months, in tandem with or ahead of the 5/10 yearly wage revisions for its workers/executives scheduled in FY17.

We continue to believe that CIL is a good long-term story. On our FY17F normalised earnings, the stock trades at 12.1x P/E (EPS: R33.5) and 7.7x EV/Ebitda (10.1x EV/Ebitda and 14.7x P/E on reported earnings).

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