India Daily, October 3, 2011
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INDIA DAILY October 3, 2011 India 30-Sep 1-day1-mo 3-mo Sensex 16,454 (1.5) (2.2) (12.3) Nifty 4,943 (1.4) (1.9) (12.2) Contents Global/Regional indices Daily Alerts Dow Jones 10,913 (2.2) (2.9) (13.3) Nasdaq Composite 2,415 (2.6) (2.6) (14.2) Company FTSE 5,128 (1.3) (3.1) (14.4) Coal India: Mining Bill moves ahead Nikkie 8,541 (1.8) (4.6) (13.4) Hindalco Industries: Hindalco plant visit takeaways: Good execution Hang Seng 16,971 (3.5) (16.0) (24.2) KOSPI 1,770 0.0 (5.3) (16.8) Sun TV Network: A tale of two markets Value traded – India Sector Cash (NSE+BSE) 137 137 137 Automobiles: Festive season off to a strong start: Derivatives (NSE) 939 1,088 1,816 Property: REIFBS 2011 conference key takeaways Deri. open interest 1,470 1,072 1,606 Technology: 2QFY12E preview - expect a robust quarter; demand commentary critical Economy Forex/money market Change, basis points Economy: 1QFY12 BoP: CAD widens back to 3% 30-Sep 1-day 1-mo 3-mo Rs/US$ 49.0 1 298 455 10yr govt bond, % 8.5 6 18 14 Net investment (US$mn) News Round-up 28-Sep MTD CYTD ` RIL (RIL IN) - BP plan to start drilling in the satellite fields of D1 and D3 in KG basin to FIIs 51 - (86) augment production may face a hurdle as the government is averse to giving MFs (32) - (282) clearance for the same. (FNLE-Mon) Top movers -3mo basis ` Cairn India (CAIR IN) has struck natural gas reserves in the first well it drilled in the Change, % offshore Mannar basin of Sri Lanka. (BSTD-Mon) Best performers 30-Sep 1-day 1-mo 3-mo IDEA IN Equity 98.5 0.5 (1.7) 24.9 ` Coal India (COAL IN) might invest up to USD 8.16 bn in the 12th Plan period ending UTCEM IN Equity 1141.6 0.4 3.8 22.0 2017 towards development of mines for augmenting production. (BSTD-Mon) MM IN Equity 804.8 (1.1) 5.2 16.5 ACEM IN Equity 148.9 1.2 9.8 15.0 ` The foreign debt of telecom operators such as Bharti Airtel (BHARTI IN) and Reliance ACC IN Equity 1098.6 0.8 8.2 15.0 Communication (RCOM IN) might weigh even more as the rupee depreciates. (BSTD- Worst performers Mon) IVRC IN Equity 35.2 (3.8) (1.7) (50.6) ` In a clear victory to the management at Maruti Suzuki India Ltd (MSIL IN), the workers RCAPT IN Equity 315.2 (12.3) (22.7) (45.9) on protest at the Manesar facility accepted the terms put forwarded by the company CRG IN Equity 152.5 (0.0) 1.5 (42.4) HDIL IN Equity 98.0 (4.1) (7.3) (40.5) bringing an end to 33 days of labor unrest at the factory. (BSTD-Sun) EDSL IN Equity 238.4 1.5 21.0 (39.9) ` Maruti Suzuki (MSIL IN) to raise output of Swift by 40%, co. to shift entire production to Manesar factory as labor unrest ends. (ECNT) ` JSW Cement is set to commence production from its Nandyal plant in Andhra Pradesh from next month. (BSTD-Sun) ` The festival season seems to have brought some respite to car makers, with the country's 10 leading manufacturers together posting 0.93% decline, selling 203,678 units last month as compared to 205,591 units sold during the corresponding period last year. (BSTD-Sun) ` UTI Mutual Fund has successfully raised around USD 1bn through its India dedicated debt fund from overseas investors. (ECNT) ` NMDC Ltd (NMDC IN), which had recently struck a deal to buy 50% in Australia's Legacy Iron Ore, will acquire five more mines abroad. (BSTD-Sat) Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD Coal India (COAL) Metals & Mining SEPTEMBER 30, 2011 UPDATE Coverage view: Cautious Mining Bill moves ahead. The Union Cabinet has approved the Mines and Minerals Price (Rs): 333 (Development and Regulation) Bill (MMDR Bill), 2011 that aims to introduce a better Target price (Rs): 454 legislative environment for attracting investment and technology into the mining sector. BSE-30: 16,454 The contentious 26% profit sharing for coal mining leases remains, though we see the earnings impact curtailed to 10-12% of FY2013E earnings that could be further offset by a reduction extant social overhead and/or price increase (2-5%) to absorb the impact of profit sharing. We maintain ADD rating and target price of Rs454/share. Company data and valuation summary Coal India Stock data Forecasts/Valuations 2011 2012E 2013E 52-week range (Rs) (high,low)422-245 EPS (Rs) 17.3 24.1 29.3 Market Cap. (Rs bn) 2,104.6 EPS growth (%) 13.6 39.1 21.9 Shareholding pattern (%) P/E (X) 19.3 13.8 11.4 Promoters 90.0 Sales (Rs bn) 550.9 661.9 716.3 FIIs 6.4 Net profits (Rs bn) 109.3 152.0 185.4 MFs 1.1 EBITDA (Rs bn) 153.1 200.9 222.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.8 7.7 6.4 Absolute (11.3) (15.2) 0.0 ROE (%) 35.1 38.2 36.7 Rel. to BSE-30 (10.1) (2.9) 0.0 Div. Yield (%) 1.2 2.2 2.6 Mining tax to be levied on previous year’s profits, likely to impact earnings by ~12% The draft bill as approved by the Cabinet maintains the proposal of sharing 26% of mining profits of the preceding year to be contributed to the District Mineral Foundation. The levy of mining tax on the preceding year’s profits increases the likelihood of it being construed as a tax deductible expense, akin to royalty and cess. We note that the full EPS impact of a mining tax will reduce to just 13% for FY2013E EPS, assuming tax deductibility of the contribution (refer Exhibit 1 for impact analysis under different scenarios) even without considering a corresponding price increase to offset the impact such contributions. Timelines – unlikely to be implemented before mid-FY2013E at best The Bill has been approved by the Cabinet and is proposed to be tabled in the Parliament in the winter session. Post this, there would be comments from the standing committee. Findings and comments of the standing committee may or may not be accepted by the Government. In our view, the implementation of the bill is unlikely before mid-FY2013E. We also note that the implementation timelines of the bill could correspond with the end of the wage negotiation process which would allow CIL to absorb the entire impact with a single price hike. Trimming of CSR expense and pricing power could offset potential impact CIL incurred Rs22.3 bn (20% of PAT) under Social Overhead expenses in FY2011, which included a combination of employee as well as local community welfare expenses. Even if CIL does not have the liberty of doing away entirely with its CSR commitments —a 25% reduction in social overhead expenses (along with tax deductibility allowed) could reduce the impact of the mining tax to 10% of FY2013E EPS. Further, imposition of the mining tax strengthens the case for a judicious price increase in FY2013E. The mining bill, if passed in its current form (even if applicable by FY2013E), will strengthen CIL’s case to increase prices for the power sector, which has not seen a price increase since October 2009. A price increase of ~3.5% (assuming tax deductibility) will suffice to compensate the incidence of the mining tax. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Coal India Metals & Mining Our current estimates build a modest 3% yoy increase in prices in FY2013E, primarily from a favorable sales mix and better realizations for market-driven coal realizations. The CIL management has already stated its intent of compensating any incidence of the mining bill through a price hike. This is aligned with CIL’s pricing policy of maintaining margins by taking price increases to offset any incremental cost incidence. Full impact of mining tax still implies a 20% upside from CMP, reiterate ADD We note that the worst case impact of a mining tax (with CIL being taxed the entire 26% of preceding year’s PAT and tax deductibility) would reduce our fair value estimate of CIL to Rs402/share (20% above the CMP). Further, as discussed above, the eventual impact could be further muted owing to mix of offsetting levers available. We maintain our ADD rating and target price of Rs454/share. Our target price is based on 13X FY2013E EPS adjusted for overburden removal and interest income and implies an EV/EBITDA of 9X on FY2013E EBITDA (adjusted for overburden removal). CIL currently trades at 8X FY2013E EPS (adjusted) and 6X FY2013E EBITDA (adjusted). Key excerpts from the draft Mines and Mineral (Development and Regulation) Bill, 2011 We highlight below some key excerpts of the draft MMDR Bill relevant to profit sharing for coal miners. ` Profit sharing percentage at 26% of preceding year’s PAT – Chapter VIII, Clause 42.2 (b) states – “in case of coal and lignite, an amount equal to twenty-six per cent. of the profit to be called as profit sharing percentage (after deduction of tax paid) of the immediately preceding financial year from mining related operations in respect of the lease”.