Sector Update | 9 January 2018
Upgrading earnings for Coal India led by big price hike
But lowering EPS estimates for aluminum smelters
Coal price hike of 8%:
Coal India (COAL) has announced a price hike of INR64b for
FY19E, based on its target coal production of 630mt. This translates into an average
price hike of ~INR100/t, which is ~8% of average realization in FY18 for linkage
Steep price hikes in many grades:
We note that the price hike is not uniform across
grades (Exhibits 1 and 2), as COAL has tried to rationalize pricing on INR/Kcal basis
(refer Column 3 & 4). Grades 11-14 have witnessed a sharper price increase
compared to grades 8-9. Price hike for grades 6-7 is steepest. Prices for grades 1-5
and grades 15-17 – which account for barely 8% of its total volumes – have been
reduced slightly. COAL intends to move fully toward INR/kcal basis of pricing from 1
April 2018, which should be revenue-neutral if not revenue-accretive.
Imports are still very expensive:
COAL’s prices remain highly competitive compared
to imports. According to our ballpark calculations (Exhibit 3), the average landed
price of coal on INR/kcal basis on India ports is at 80 – 159% premium to cost of coal
at COAL’s mines. However, this is not an absolute conclusion because consumers
have to add the inland transportation cost to arrive at the landed cost.
Aluminum smelters worst impacted:
The price hike is likely to increase average cost
of power generation by 7paise/kwh. For independent power generators, the
increase in cost is largely pass-through to the power distribution companies
(discoms), but non-power sector consumers like metal and cement producers will
have to absorb the cost increase. Aluminum smelters will be worst hit because the
production process is highly energy-intensive at 14,000kwh/t compared to other
metals – for example, 500kwh/t for BoF-based steel making, 1,000kwh/t for EAF-
based steel making, and 3,000-4,000kwh/t for zinc/copper/ferro-alloy production.
Secondary steel producers can easily absorb the cost increase as they are benefiting
from the steep steel price increase.
Earnings upgrade for COAL, but downgrade for Nalco, Hindalco and
We are increasing EPS of COAL by 29% for FY19E. However, we lower EPS by 5%
for Nalco, and 2% for Hindalco and Vedanta each (Exhibit 4).
We are also raising the target price by 6% to INR356/share for COAL. At the
same time, we are reducing the target price by 4% to INR81 for NACL (Nalco), by
2% to INR321 for HNDL (Hindalco) and by 2% to INR386 for VEDL (Vedanta) to
account for the cost increase. COAL and HNDL are our top picks.
Sanjay Jain - Research analyst
(SanjayJain@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal - Research analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.