22 December 2013
Wipro - Company Update - Change in sales strategy delivering credibly: Centrum
Rating: Buy; Target Price: Rs620; CMP: Rs522; Upside: 19%
Change in sales strategy delivering credibly
We maintain Buy on Wipro with a revised TP of Rs620 (earlier Rs600).
Wipro’s non-top-10 client growth sluggishness, the key reason for its
revenue underperformance vis-à-vis TCS, could change for the better.
The account mining strategy through assigning client engagement
managers to Mega and Gamma accounts has delivered good results within
the Top-10 and hold substantive potential for the non-top 10 accounts
as well. We also anticipate improved new account traction led by BFSI
and Europe. In a recent meeting with the company, we felt that it is
upbeat on encouraging revenue traction next year compared to FY14. We
revise our estimates marginally and they remain higher than consensus.
$ Wipro has lagged TCS in non-top-10 growth, but matches Top-10
growth: Wipro has come close to matching TCS’ growth for the
Top-client and the Top 6-10 clients while exceeding TCS’ growth rate
for the Top 2-5 (see table in attached report). While the sales engine
seems to be smooth, with new account relationships accounting for over
3% of revenue by every Q4 over FY11-FY13 (vs. 2.6-3.5% for TCS), it
has lagged TCS substantially in non-Top-10 client growth. We note that
the same trend holds for both a 5-year and 2-year period. The key
account strategy at Wipro seems to have delivered results helping it
narrow the growth gap with TCS, at least for Top-10 clients.
$ New sales leadership for BFSI and Europe to help improve traction
with non-top-10: We expect Wipro to increase sales efforts in BFSI as
it now has two senior leaders with P&L responsibilities for BFSI (one
who was earlier with Infosys and the other was earlier Group CTO at a
large UK retail bank). With an internal structure that provides
incentives to collaborate, we expect BFSI traction to improve given
the new senior leadership. Europe has also got thrust with a key
senior hire in Ulrich Meister (formerly head of the Global System
Integration business at T-Systems). While he does not hold a direct
P&L responsibility, he still has revenue targets and will manage key
client relationships.
$ Double counting revenue for internal credit to provide incentives to
collaborate: With two leaders for BFSI, there is potential for
conflict and turf-wars. But Wipro has a process-based approach to
smoothen the kinks by allowing double-counting of revenue for internal
recognition. While this structure has been in place earlier, the new
emphasis on results will encourage proactive collaborative efforts
across both P&L units and shadow P&L units (such as Continental
Europe, Growth Markets etc).
$ Increasing revenue and margin estimates; maintain Buy: Wipro is
currently trading at 14.4x Oct’13-Sep’14 EPS and at a steep discount
of 19% to Infosys in P/E terms. We modify our revenue estimates by
reducing them slightly for FY14E (to account for furloughs which we
had earlier anticipated to be curtailed), while increasing them for
FY15E and FY16E for IT Svcs. We have also adjusted for the
discontinuation of Wipro branded hardware - overall revenue impact of
(1.1)% and (0.1)% impact on EPS. We maintain Buy and increase our TP
to Rs620 (14x 1-Year Fwd EPS).
Thanks & Regards
--
Change in sales strategy delivering credibly
We maintain Buy on Wipro with a revised TP of Rs620 (earlier Rs600).
Wipro’s non-top-10 client growth sluggishness, the key reason for its
revenue underperformance vis-à-vis TCS, could change for the better.
The account mining strategy through assigning client engagement
managers to Mega and Gamma accounts has delivered good results within
the Top-10 and hold substantive potential for the non-top 10 accounts
as well. We also anticipate improved new account traction led by BFSI
and Europe. In a recent meeting with the company, we felt that it is
upbeat on encouraging revenue traction next year compared to FY14. We
revise our estimates marginally and they remain higher than consensus.
$ Wipro has lagged TCS in non-top-10 growth, but matches Top-10
growth: Wipro has come close to matching TCS’ growth for the
Top-client and the Top 6-10 clients while exceeding TCS’ growth rate
for the Top 2-5 (see table in attached report). While the sales engine
seems to be smooth, with new account relationships accounting for over
3% of revenue by every Q4 over FY11-FY13 (vs. 2.6-3.5% for TCS), it
has lagged TCS substantially in non-Top-10 client growth. We note that
the same trend holds for both a 5-year and 2-year period. The key
account strategy at Wipro seems to have delivered results helping it
narrow the growth gap with TCS, at least for Top-10 clients.
$ New sales leadership for BFSI and Europe to help improve traction
with non-top-10: We expect Wipro to increase sales efforts in BFSI as
it now has two senior leaders with P&L responsibilities for BFSI (one
who was earlier with Infosys and the other was earlier Group CTO at a
large UK retail bank). With an internal structure that provides
incentives to collaborate, we expect BFSI traction to improve given
the new senior leadership. Europe has also got thrust with a key
senior hire in Ulrich Meister (formerly head of the Global System
Integration business at T-Systems). While he does not hold a direct
P&L responsibility, he still has revenue targets and will manage key
client relationships.
$ Double counting revenue for internal credit to provide incentives to
collaborate: With two leaders for BFSI, there is potential for
conflict and turf-wars. But Wipro has a process-based approach to
smoothen the kinks by allowing double-counting of revenue for internal
recognition. While this structure has been in place earlier, the new
emphasis on results will encourage proactive collaborative efforts
across both P&L units and shadow P&L units (such as Continental
Europe, Growth Markets etc).
$ Increasing revenue and margin estimates; maintain Buy: Wipro is
currently trading at 14.4x Oct’13-Sep’14 EPS and at a steep discount
of 19% to Infosys in P/E terms. We modify our revenue estimates by
reducing them slightly for FY14E (to account for furloughs which we
had earlier anticipated to be curtailed), while increasing them for
FY15E and FY16E for IT Svcs. We have also adjusted for the
discontinuation of Wipro branded hardware - overall revenue impact of
(1.1)% and (0.1)% impact on EPS. We maintain Buy and increase our TP
to Rs620 (14x 1-Year Fwd EPS).
Thanks & Regards
--
Swaraj Engines - Initiating Coverage - Powering the strong "Swaraj" brand:: Centrum
Rating: Buy; Target Price: Rs790; CMP: Rs569; Upside: 39%
Powering the strong “Swaraj” brand
SEL, probably one of the best proxies on the tractor growth story,
should be a key beneficiary of the recent structural change in the
tractors market. We believe that there is a possibility of SEL merging
with Swaraj tractors, now part of M&M FES division, or becoming a part
of the much bigger engine ecosystem at M&M. The Swaraj brand of
tractors, consumer of SEL’s products, has seen remarkable improvement
in operations and market share post acquisition by M&M; it today
commands 14% market share up from 9% in FY08. Zero debt and superior
return ratios will help it withstand adverse business cycles. We are
above-consensus on earnings and target price for this relatively
thinly-covered stock.
$ SEL can be part of a much bigger entity and get the required scale:
We believe that as a logical long term outcome, SEL will either be
merged with the operations of Swaraj tractors, part of M&M FES
division (in line with the structure followed by other tractor
manufactures, integrated unit with in-house engine facility) or will
have the chance to become part of much bigger engine ecosystem at M&M
(logical to have related engines business under one umbrella). This is
subject to M&M successfully taking 17.39% stake from Kirloskar
Industries, the other large shareholder of SEL.
$ Market checks suggest underlying drivers for tractor demand intact:
Our interaction with tractor dealers, financiers and recent data
points related to agriculture/tractor sector largely validate our view
on tractor industry and make us believe that factors such as
increasing use for non-farm (commercial) purposes, shortening of
replacement cycle, rising rural income and shortage of labour would
continue to support volume growth. Further, the current penetration
level for tractors in India is much lower than in developed and other
emerging economies. Hence, we expect the industry to grow at ~10-12%,
in line with growth in FY10-13 (higher than the growth in the last
decade).
$ A proxy on structural shift seen in tractor industry in India,
Swaraj brand getting better foothold: While industry drivers continue
to remain favourable for the domestic tractor industry, growth of SEL
is directly linked to the underlying growth of Swaraj Brand as it
caters to ~80% of Swaraj tractor’s engine requirements. Since the
takeover by M&M, there has been a complete turnaround in the fate of
‘Swaraj’ brand of tractors, with attendant positive impact on SEL.
While Swaraj tractors had slipped to 5th place with 9% market share
before the acquisition by M&M in 2007, it now commands a market share
of 14% and ranks 3rd behind M&M tractors and TAFE.
$ Valuation and key risks: We have valued the company at 11x FY16E EPS
(mean+sd1) as we believe that strong earnings, return ratios and the
ability to generate free cash flow with strong FCF yield at 6% (
average for past 5 years) can engender a further re-rating of the
stock. The absence of a direct comparable (other engine companies are
diversified) can ensure that the stock trades at a premium to other
auto-ancillaries. We arrive at a price target of Rs790, an upside of
39% from the CMP. Key risks to our thesis are: a) Dependence on single
customer i.e. Swaraj brand, and b) Drought in the forecasted period.
Thanks & Regards
Powering the strong “Swaraj” brand
SEL, probably one of the best proxies on the tractor growth story,
should be a key beneficiary of the recent structural change in the
tractors market. We believe that there is a possibility of SEL merging
with Swaraj tractors, now part of M&M FES division, or becoming a part
of the much bigger engine ecosystem at M&M. The Swaraj brand of
tractors, consumer of SEL’s products, has seen remarkable improvement
in operations and market share post acquisition by M&M; it today
commands 14% market share up from 9% in FY08. Zero debt and superior
return ratios will help it withstand adverse business cycles. We are
above-consensus on earnings and target price for this relatively
thinly-covered stock.
$ SEL can be part of a much bigger entity and get the required scale:
We believe that as a logical long term outcome, SEL will either be
merged with the operations of Swaraj tractors, part of M&M FES
division (in line with the structure followed by other tractor
manufactures, integrated unit with in-house engine facility) or will
have the chance to become part of much bigger engine ecosystem at M&M
(logical to have related engines business under one umbrella). This is
subject to M&M successfully taking 17.39% stake from Kirloskar
Industries, the other large shareholder of SEL.
$ Market checks suggest underlying drivers for tractor demand intact:
Our interaction with tractor dealers, financiers and recent data
points related to agriculture/tractor sector largely validate our view
on tractor industry and make us believe that factors such as
increasing use for non-farm (commercial) purposes, shortening of
replacement cycle, rising rural income and shortage of labour would
continue to support volume growth. Further, the current penetration
level for tractors in India is much lower than in developed and other
emerging economies. Hence, we expect the industry to grow at ~10-12%,
in line with growth in FY10-13 (higher than the growth in the last
decade).
$ A proxy on structural shift seen in tractor industry in India,
Swaraj brand getting better foothold: While industry drivers continue
to remain favourable for the domestic tractor industry, growth of SEL
is directly linked to the underlying growth of Swaraj Brand as it
caters to ~80% of Swaraj tractor’s engine requirements. Since the
takeover by M&M, there has been a complete turnaround in the fate of
‘Swaraj’ brand of tractors, with attendant positive impact on SEL.
While Swaraj tractors had slipped to 5th place with 9% market share
before the acquisition by M&M in 2007, it now commands a market share
of 14% and ranks 3rd behind M&M tractors and TAFE.
$ Valuation and key risks: We have valued the company at 11x FY16E EPS
(mean+sd1) as we believe that strong earnings, return ratios and the
ability to generate free cash flow with strong FCF yield at 6% (
average for past 5 years) can engender a further re-rating of the
stock. The absence of a direct comparable (other engine companies are
diversified) can ensure that the stock trades at a premium to other
auto-ancillaries. We arrive at a price target of Rs790, an upside of
39% from the CMP. Key risks to our thesis are: a) Dependence on single
customer i.e. Swaraj brand, and b) Drought in the forecasted period.
Thanks & Regards
Steel -Stocks have nearly doubled, but improvement not fully priced in; Multiple specific catalysts other than steel cycle :: JPMorgan
Indian steel stocks have nearly doubled from their August lows and investor
interest has picked up. Admittedly from here with Chinese iron ore inventories
increasing, there is a risk of a pull-back in spot prices, which can lead to some
correction in the Indian steel names. However, we would view any correction as a
buying opportunity. In our view, the multi-year headwinds facing the sector have
just started to ease. Operating environment improvement is not fully priced in,
with INR weakness aiding volume growth. The multi-year domestic demand
slowdown is likely to turn in FY15E, aiding local premium increase. We maintain
our view that the Indian steel names are less of a steel price play and more of
specific country/company events. We see upside risks to our and street estimates
for FY15-16E. TATA remains our top pick as Europe improvement continues,
while SAIL has the biggest beta to domestic demand. JSW benefits the most from
INR weakness. Valuations are not expensive and investor positioning is still UW.
Bull/Bear case fair values imply risk reward is still in favor at current prices
Stocks have nearly doubled, but operating environment improvement has
just started. We highlighted in our ~200 page industry note (India Metals &
Mining: From Cash Guzzlers to Cash Generators: Why the sector is NOT Dead
Money but can give large returns dated 20 Aug, 2013) that stocks were pricing
in the perfect storm and investor positioning was at multi-year lows. From there
a global sector rally (triggered by positive Chinese data points) triggered a sharp
up move in the Indian names, but over the past month, Indian steel names have
broken out and continued to move up. We believe this is justified and near-term
corrections aside, likely to continue over the next 12 months. INR weakness
provides strong volume and ASP support across the sector. Margins across the
three companies are likely to pick up sharply in H2FY14, in our view, and we
see upside risks to our street-high FY15E estimates.
Domestic demand coming out of multi-year declines; Capex cycle coming to
a close: Steel import substitution and export pick-up has just started and at INR
of 60+ would be likely ongoing. The ~3 year domestic demand weakness has
likely peaked and from here demand, particularly in Longs should improve. The
capex cycle for these companies is broadly coming to a close.
Less of a steel play and more of country/company play: We maintain our
view, that the Indian steel names are less of a steel price play. SAIL is a Beta on
domestic India economic growth given its domestic exposure, and presence in
Long products. TATA remains our top pick and with Europe improving, we
believe TATA is the name with potentially the largest potential upside over the
next two years on an improving Europe. We expect JSW to benefit from cost
savings and an impressive operating performance.
Bull vs Bear case highlight risk reward is still in favor of investors at CMP
interest has picked up. Admittedly from here with Chinese iron ore inventories
increasing, there is a risk of a pull-back in spot prices, which can lead to some
correction in the Indian steel names. However, we would view any correction as a
buying opportunity. In our view, the multi-year headwinds facing the sector have
just started to ease. Operating environment improvement is not fully priced in,
with INR weakness aiding volume growth. The multi-year domestic demand
slowdown is likely to turn in FY15E, aiding local premium increase. We maintain
our view that the Indian steel names are less of a steel price play and more of
specific country/company events. We see upside risks to our and street estimates
for FY15-16E. TATA remains our top pick as Europe improvement continues,
while SAIL has the biggest beta to domestic demand. JSW benefits the most from
INR weakness. Valuations are not expensive and investor positioning is still UW.
Bull/Bear case fair values imply risk reward is still in favor at current prices
Stocks have nearly doubled, but operating environment improvement has
just started. We highlighted in our ~200 page industry note (India Metals &
Mining: From Cash Guzzlers to Cash Generators: Why the sector is NOT Dead
Money but can give large returns dated 20 Aug, 2013) that stocks were pricing
in the perfect storm and investor positioning was at multi-year lows. From there
a global sector rally (triggered by positive Chinese data points) triggered a sharp
up move in the Indian names, but over the past month, Indian steel names have
broken out and continued to move up. We believe this is justified and near-term
corrections aside, likely to continue over the next 12 months. INR weakness
provides strong volume and ASP support across the sector. Margins across the
three companies are likely to pick up sharply in H2FY14, in our view, and we
see upside risks to our street-high FY15E estimates.
Domestic demand coming out of multi-year declines; Capex cycle coming to
a close: Steel import substitution and export pick-up has just started and at INR
of 60+ would be likely ongoing. The ~3 year domestic demand weakness has
likely peaked and from here demand, particularly in Longs should improve. The
capex cycle for these companies is broadly coming to a close.
Less of a steel play and more of country/company play: We maintain our
view, that the Indian steel names are less of a steel price play. SAIL is a Beta on
domestic India economic growth given its domestic exposure, and presence in
Long products. TATA remains our top pick and with Europe improving, we
believe TATA is the name with potentially the largest potential upside over the
next two years on an improving Europe. We expect JSW to benefit from cost
savings and an impressive operating performance.
Bull vs Bear case highlight risk reward is still in favor of investors at CMP
JPMorgan: India PSU banks Basel 3 capital raising - a challenge, not a crisis
Our estimate of PSU banks’ capital needs indicate a Rs1.8tr requirement
by FY18E. Even if the government has to fully fund this (in a worst-case
scenario), it is unlikely to lead to any systemic issues – the incremental
impact on the fisc is ~0.3% if spread out over FY14-FY18. Moreover, our
assumptions are quite conservative and any upturn in the cycle will bring
this requirement down quite sharply. The main risk is for equity investors
– the apparently attractive valuations are significantly negated by the
possibility of significant dilution. Our preference, thus, continues for
better capitalized PSU banks like BOB.
Mind the gap - Rs1.8tr. We estimate the PSU banks will need Rs 1.8tr
in outside equity capital by FY18. We capture a reasonably gloomy
scenario for this - PPOP ROAs at last five years' average (including
periodic pension hits), gross NPAs rising 50% from here and the banks
reaching 70% provision coverage including the slippage from
restructured assets. We also assume 9.5% CET1 ratios and a premium
for the larger banks, in line with RBI proposals. We've detailed our
methodology inside the report.
Economic recovery not captured. We have assumed the economic
cycle staying weak through to FY18 (this is a stress test of sorts). A
recovery would reduce the problem on two counts - higher levels of
internal profit generation and the ability to raise capital externally.
Conversely, a shock to the economy could see our conservative asset
quality assumptions tested, especially in infrastructure. In this case, the
government's ability to put up the capital may be tested, though lower
growth would largely address the gap.
Can be financed. The Rs 1.8tr gap should be financed by the
government over five years with reasonable comfort (assuming markets
remain as unhelpful as it is now). We estimate this to be ~0.3% of GDP
through to FY18E. They key however, is that the government has to
make this a continuous process rather than leave it for the end – which it
has done with an Rs150bn allocation in FY14.
Dilution risk severe, divergence among banks. A systemic crisis looks
unlikely, but equity investors still need to be very wary of dilution risks.
The extent of dilution is expected to be widely divergent across banks,
given the very different starting positions on both capital adequacy and
ROAs. We are wary of low-CAR, low-ROA banks which look
apparently cheap - the post-dilution valuations may not look so
attractive. The equation changes dramatically if the economy and the
market recovers in time for these banks to be able to access markets for
the capital, but that’s a double-edged sword we are wary of.
by FY18E. Even if the government has to fully fund this (in a worst-case
scenario), it is unlikely to lead to any systemic issues – the incremental
impact on the fisc is ~0.3% if spread out over FY14-FY18. Moreover, our
assumptions are quite conservative and any upturn in the cycle will bring
this requirement down quite sharply. The main risk is for equity investors
– the apparently attractive valuations are significantly negated by the
possibility of significant dilution. Our preference, thus, continues for
better capitalized PSU banks like BOB.
Mind the gap - Rs1.8tr. We estimate the PSU banks will need Rs 1.8tr
in outside equity capital by FY18. We capture a reasonably gloomy
scenario for this - PPOP ROAs at last five years' average (including
periodic pension hits), gross NPAs rising 50% from here and the banks
reaching 70% provision coverage including the slippage from
restructured assets. We also assume 9.5% CET1 ratios and a premium
for the larger banks, in line with RBI proposals. We've detailed our
methodology inside the report.
Economic recovery not captured. We have assumed the economic
cycle staying weak through to FY18 (this is a stress test of sorts). A
recovery would reduce the problem on two counts - higher levels of
internal profit generation and the ability to raise capital externally.
Conversely, a shock to the economy could see our conservative asset
quality assumptions tested, especially in infrastructure. In this case, the
government's ability to put up the capital may be tested, though lower
growth would largely address the gap.
Can be financed. The Rs 1.8tr gap should be financed by the
government over five years with reasonable comfort (assuming markets
remain as unhelpful as it is now). We estimate this to be ~0.3% of GDP
through to FY18E. They key however, is that the government has to
make this a continuous process rather than leave it for the end – which it
has done with an Rs150bn allocation in FY14.
Dilution risk severe, divergence among banks. A systemic crisis looks
unlikely, but equity investors still need to be very wary of dilution risks.
The extent of dilution is expected to be widely divergent across banks,
given the very different starting positions on both capital adequacy and
ROAs. We are wary of low-CAR, low-ROA banks which look
apparently cheap - the post-dilution valuations may not look so
attractive. The equation changes dramatically if the economy and the
market recovers in time for these banks to be able to access markets for
the capital, but that’s a double-edged sword we are wary of.
Coal India Ltd - Company Update- Revenue enhancing measures offer relief: Centrum
Rating: Buy; Target Price: Rs330; CMP: Rs287; Upside: 15%
Revenue enhancing measures offer relief
We retain Buy on Coal India with a revised TP of Rs330; the marginal
relief for realizations post hike in WCL non-coking coal prices and in
sizing & loading charges could reverse the recent underperformance of
the stock. Realizations had come under pressure due to inferior coal
mix & inventory sales in H1FY14; better mix in H2 coupled with pricing
measures should be materially beneficial. We expect positive EBITDA
impact of Rs20-25/tonne due to the above initiatives. However, since
new FSA for ~71GW has already been signed, we remove the benefit of
FSA incentives completely from FY15E. We maintain our volume estimates
but revise EBITDA for FY14E/15E upwards by 2.1%/4.2%.
$ WCL price hike and increase in sizing & loading charges to support
realizations and EBITDA: WCL accounts for ~9% of CIL’s volumes and we
see positive EBITDA impact of ~Rs10/tonne due to the price hike of 10%
for non-coking coal off WCL. CIL has also announced an increase in
charges for sizing and rapid loading of coal and guided for additional
Rs2bn of revenues from this for the rest of FY14. Our calculations
suggest Rs10-15/tonne positive EBITDA impact for CIL due to this. We
see blended realizations increasing by ~2% from both these measures
combined.
$ Higher new FSA supply requirement to wipe out incentives: CIL has
signed ~71GW of new FSAs already and higher coal supply requirement
from these new FSAs (to power plants which meet all conditions of
these new FSAs on plant commissioning, PPA etc) will wipe out the
incentives earned in the past for higher supplies on old FSAs as we
see supplies getting diverted to meet obligations of new FSA’s.
Additionally, there is a likelihood of diversion of coal from
e-auction to meet the demand if required. We build in no incentives
from FY15E and expect e-auction volume share to drop to 8.5% by FY17E
from 10.6% in FY13.
$ Earnings revised upwards, CIL likely to appeal against CCI penalty:
CIL (according to media reports) is likely to appeal against the
recent Competition Commission order imposing a penalty of Rs17.7bn
(~3% of cash reserves, Rs3/share) for abusing its dominant position.
We do not expect any negative impact of the order and have not
factored in any penalty outgo in our estimates. We maintain volume
estimates for FY14E/15E to ~484MT/508MT but adjust blended
realizations higher by 0.5%/0.9% to factor in higher revenues from WCL
and sizing & loading charges mitigated to some extent by loss of
yearly incentives (we expect no incentives from FY15E). We revise our
$ EBITDA estimates upwards by 2.1%/4.2% for FY14E/15E.
$ Valuations attractive, higher dividend a realistic expectation: We
find the valuations undemanding, adjusted for OBR provisioning (~20%
discount to global peer average). Additionally, we remain positive on
i) high cash on books and dividend yield of 5%+ with a strong
likelihood of special dividend in the next 3-6 months and ii)
potential upside in volumes and pricing on the back of strong demand
and improvement in logistics/railway rake availability. Recent
announcement of deferment of divestment is also a positive. Key risks
are lower volumes due to rake shortage & production bottlenecks,
penalties on new FSAs due to large shortfall in supply and larger loss
in e-auction volumes for new FSAs.
Thanks & Regards,
Revenue enhancing measures offer relief
We retain Buy on Coal India with a revised TP of Rs330; the marginal
relief for realizations post hike in WCL non-coking coal prices and in
sizing & loading charges could reverse the recent underperformance of
the stock. Realizations had come under pressure due to inferior coal
mix & inventory sales in H1FY14; better mix in H2 coupled with pricing
measures should be materially beneficial. We expect positive EBITDA
impact of Rs20-25/tonne due to the above initiatives. However, since
new FSA for ~71GW has already been signed, we remove the benefit of
FSA incentives completely from FY15E. We maintain our volume estimates
but revise EBITDA for FY14E/15E upwards by 2.1%/4.2%.
$ WCL price hike and increase in sizing & loading charges to support
realizations and EBITDA: WCL accounts for ~9% of CIL’s volumes and we
see positive EBITDA impact of ~Rs10/tonne due to the price hike of 10%
for non-coking coal off WCL. CIL has also announced an increase in
charges for sizing and rapid loading of coal and guided for additional
Rs2bn of revenues from this for the rest of FY14. Our calculations
suggest Rs10-15/tonne positive EBITDA impact for CIL due to this. We
see blended realizations increasing by ~2% from both these measures
combined.
$ Higher new FSA supply requirement to wipe out incentives: CIL has
signed ~71GW of new FSAs already and higher coal supply requirement
from these new FSAs (to power plants which meet all conditions of
these new FSAs on plant commissioning, PPA etc) will wipe out the
incentives earned in the past for higher supplies on old FSAs as we
see supplies getting diverted to meet obligations of new FSA’s.
Additionally, there is a likelihood of diversion of coal from
e-auction to meet the demand if required. We build in no incentives
from FY15E and expect e-auction volume share to drop to 8.5% by FY17E
from 10.6% in FY13.
$ Earnings revised upwards, CIL likely to appeal against CCI penalty:
CIL (according to media reports) is likely to appeal against the
recent Competition Commission order imposing a penalty of Rs17.7bn
(~3% of cash reserves, Rs3/share) for abusing its dominant position.
We do not expect any negative impact of the order and have not
factored in any penalty outgo in our estimates. We maintain volume
estimates for FY14E/15E to ~484MT/508MT but adjust blended
realizations higher by 0.5%/0.9% to factor in higher revenues from WCL
and sizing & loading charges mitigated to some extent by loss of
yearly incentives (we expect no incentives from FY15E). We revise our
$ EBITDA estimates upwards by 2.1%/4.2% for FY14E/15E.
$ Valuations attractive, higher dividend a realistic expectation: We
find the valuations undemanding, adjusted for OBR provisioning (~20%
discount to global peer average). Additionally, we remain positive on
i) high cash on books and dividend yield of 5%+ with a strong
likelihood of special dividend in the next 3-6 months and ii)
potential upside in volumes and pricing on the back of strong demand
and improvement in logistics/railway rake availability. Recent
announcement of deferment of divestment is also a positive. Key risks
are lower volumes due to rake shortage & production bottlenecks,
penalties on new FSAs due to large shortfall in supply and larger loss
in e-auction volumes for new FSAs.
Thanks & Regards,
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