Coal India - Q4 FY 2011 Expectation - Motilal Oswal

COAL INDIA: Earnings drivers — Market-linked volumes, lower tax, Operating leverage a double-edged sword, inflation remains high

We expect CIL to report robust earnings CAGR of 29% till FY13, and reported earnings in FY12 are contingent on the quantum and timing of price increases.

In FY12, coal sales on market linked prices will increase to ~100m tons, up from ~75m tons in FY11. Thus, CIL is strongly leveraged to international coal prices.

The other variable driving earnings for CIL is tax break available at BCCL and ECL. We expect consolidated tax/PBT ratio for CIL to decline to 32% in FY12E.

In FY11, CIL's provisional despatches were 424mt (up 2.2% YoY) and production was 431mt (flat YoY).

CIL's staff costs and contractual expenses are key costs. A large part of this increase has been due to higher dearness allowances led by higher inflation.

We believe that these expenses are fixed in nature and thus robust volume growth could lead to strong operating leverage. However, in FY11, volume growth was modest with despatches up 2.2% YoY, necessitating a price increase in February 2011. Inflation remains above the comfort zone and any volume disappointment going forward will need to be absorbed from internal accruals, as surplus of Rs30b-35b from the price hike in February 2011 will be adjusted against future cost increases.

Source : Equity Bulls

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