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INDIA DAILY
December 31,
2010 |
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Contents :
Update
Coal India: Stumbling over environment hurdle |
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News Round-up
With
the Centre developing cold feet on increasing diesel prices, the
finance ministry may give in to the petroleum ministry demand for
increasing the govt.'s share in petroleum subsidy. (BSTD)
Despite
the high statistical base last year, wholesale food inflation for
the week ended Dec. 18 touched a 10 month high of 14.44%. (BSTD)
Growth of
six core infrastructure sectors slumped to the lowest level since
Sept. 2002 to 2.3% in Nov. 2010, primarily due to a steep fall in
cement production durin the month. (BSTD)
The
Reliance Anil Dhirubhai Ambani Group is rebranding all its
businesses as "Reliance" rather than maintaining individual
identities for each services. (ECNT)
The
environment ministry have deferred clearances for JSW Steel's (JSTL
IN) USD 5.55bn capacity expansion proposal at Bellary plant & sought
details of coal linkage & disaster management plans among other
things. (BSTD)
SBI (SBIN
IN) plans to raise USD 2.66bn through bonds to fund its business
growth. (BSTD)
MOIL (MOIL
IN) is in talks with Gabon's govt. over acquiring possible mining
concessions in central African state. Gabon is the world's second
largest producer of manganese. (BSTD)
ONGC (ONGC
IN) has hired an ultra-deep water drilling rig from Vantage Drilling
Co. for USD 1.1bn for five years. (BSTD)
Sahara
Group has bought Grosvenor House Hotel in Central London for USD
733.33mn, making it the one of the largest acquisitions in the
hospitality space by an Indian company. (BSTD)
HCL
Infosystems (HCLI IN) would acquire 20% stake in Dubai firm Techmart
Telecom Distribution FZCO, through its Singapore based SPV. (BSTD)
KS Oils
Ltd. (KSO IN) board has approved the allotment of 16.4 million
equity shares of INR 1 each to its promoters. (BSTD)
Lanco
Infratech (LANCI IN) has won a new USD 222.22mn road project in
Uttar Pradesh. (BSTD)
Source: ECNT= Economic Times, BSTD = Business
Standard, FNLE = Financial Express, THBL = Business Line
Coal India
(COAL) - Metals & Mining
DECEMBER 31, 2010
UPDATE
Coverage view:
Attractive
Price (Rs):
308
Target price (Rs):
345
BSE-30:
20,389
Stumbling over environment hurdle. Coal
India Ltd continues to be plagued by environment hurdles, now
manifested in the form of Comprehensive Environment Pollution Index (CEPI)
that threatens 39 mn tons out of 486 mn tons of production targeted in
FY2012E. We believe that the environmental hurdle remains a key
bottleneck for projected volume growth and have maintained a
conservative 4.7% CAGR in volumes versus the company target of 6%
volume growth. |
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Management indicates production slippages on account
of CEPI
CIL management has indicated that the
production for the next two years will likely fall short of their original
targets if stricter environmental norms and proposed classification of
no-go mining areas continue to inhibit the required capacity ramp-up. We,
however, highlight that lower-thanguided production is factored to an
extent in our estimates as we build in production of 443 mn tons in
FY2011E and 463 mn tons in FY2012E as against official company target of
460 mn tons and 486 mn tons, respectively; though we do not entirely rule
out downside risks to our numbers if the standoff between Ministry of Coal
and Ministry of Environment and Forest does not find an early resolution.
Comprehensive Environmental Pollution Index (CEPI)
– a new environment hurdle
CIL management has indicated that a
continuation of CEPI norms could impact production targets by 16 mn tons
and 39 mn tons in FY2011E and FY2012E, respectively. CEPI was introduced
by Ministry of Environment and Forest (MoEF) in 2009 to assess the
environmental quality of industrial clusters in India. In January 2010,
MoEF imposed a temporary moratorium on development projects in 43 clusters
which also includes seven coalfields of CIL. The moratorium was put in
place till August 2010 but was further extended by MoEF (in October 2010)
till March 2011 thus further delaying the award of environmental clearance
for these projects.
Maintain ADD with a target price of Rs345/share
We maintain our ADD rating with a target
price of Rs345/share. Our target price is based on 12.5X FY2012E EPS
adjusted for overburden removal and interest income and implies an EV/EBITDA
of 9.2X on FY2012E EBITDA (adjusted for overburden removal). CIL currently
trades at 15X FY2012E EPS (reported) and 9.7X FY2012E EBITDA (reported).
We highlight that if CIL were to achieve volumes of 435 mn tons in
FY2012E, 5% lower than our estimate of 458 mn tons, earnings would be
impacted by 14% to Rs18/share from Rs21/shar currently, eroding Rs42/share
from our target price of Rs345/share (see Exhibit 2). We maintain our
estimates as we remain optimistic that the debate between environment and
development will likely find a plausible solution that does not put to
risk India’s energy requirements.
In our view, CIL will likely continue to command
premium multiples to account for (1) expectations of narrowing discount to
global coal prices, and (2) constantly improving employee efficiency
metrics that will further propel margin expansion. Lower-than-estimated
volumes and possible imposition of mining tax could be a key risk to our
earnings and valuation estimates.

CEPI – affected coal blocks and subsidiaries
CEPI has identified 43 clusters in India as critically
polluted and has temporarily stalled development projects in these
clusters. These clusters include seven coalfields of CIL including
Chandrapur, Korba, Jharia, Talcher, Singrauli, Raniganj and IB Valley. The
directly affected CIL subsidiaries are ECL (Raniganj), BCCL (Jharia), SECL
(Korba), NCL (Singrauli) and MCL (Talcher and IB Valley). CIL’s
coalfields, identified as critical under CEPI, contributed 295 mn tons or
68% of FY2010 production and account for ~66% of CIL’s total extractable
reserves of 21.75 bn tons (see Exhibit 4). We also highlight that a
significant portion of near-term capacity addition of CIL was supposed to
be undertaken in the Talcher and IB Valley coalfields of MCL and
continuation of CEPI norms could impact near-term ramp-up of capacity and
hence production growth.

‘No Go’—another stumbling block
Pursuant to a proposal dated July 8, 2010, MoEF
introduced initiatives for the identification of environmentally sensitive
areas classified as ‘No Go’ where coal mining activities would not be
permitted. ‘No Go' areas for mining have been defined as those that have
over 30% gross forest cover or over 10% weighted forest cover. Several
significant coalfields where CIL is currently carrying on mining
activities have been classified as ‘No Go’ including large mines such as
North Karanpura in Jharkhand, IB Valley in Orissa and Chhattisgarh,
Singrauli Coalfield in Madhya Pradesh and Uttar Pradesh and Talcher
coalfield in Orissa.







Ratings and other
definitions/identifiers
Definitions of ratings
BUY. We expect this stock to outperform the BSE Sensex by
10% over the next 12 months.
ADD. We expect this stock to outperform the BSE Sensex by
0-10% over the next 12 months.
REDUCE. We expect this stock to underperform the BSE
Sensex by 0-10% over the next 12 months.
SELL. We expect this stock to underperform the BSE Sensex
by more than 10% over the next 12 months.
Our target price are also on 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s
overall fundamental outlook on the Sector. The coverage view will consist
of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if
any, have been suspended temporarily. Such suspension is in compliance
with applicable regulation(s) and/or Kotak Securities policies in
circumstances when Kotak Securities or its affiliates is acting in an
advisory capacity in a merger or strategic transaction involving this
company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended
coverage of this company.
NC = Not Covered. Kotak Securities does not cover this
company.
RS = Rating Suspended. Kotak Securities Research has
suspended the investment rating and price target, if any, for this stock,
because there is not a sufficient fundamental basis for determining an
investment rating or target. The previous investment rating and price
target, if any, are no longer in effect for this stock and should not be
relied upon.
NA = Not Available or Not Applicable. The information is
not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and
is therefore excluded.
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