Future is bright
Event
􀂃 Coking coal price upgrades: We have upgraded our coking coal and coke price forecasts to reflect the severe tightness in the market. We have also accounted for the strength of the A$ vs US$. We have adjusted our stock price to Rs251 from Rs244.
Impact
􀂃 Coking coal forecasts up, driven by supply constraints: Our global commodities team now believes that the coking coal market is likely to continue to be extremely tight. We have upgraded our coking coal forecasts for FY09 and FY10 to $300/t, an increase of 67% and 87%, respectively. We have upgraded our Coke prices for FY09 and FY10 by 11% and 26% to $550/t and $538/t, respectively.
􀂃 Earnings – upgrades from FY3/10: GNC is self sufficient for only 70% of its coke requirement in FY3/09, and also has pre-sold 20% of its coke production at around $500/t. We reduce our EPS estimate to Rs13/sh from Rs16/sh.
However, GNC will become self sufficient in coking coal in FY3/10, and we have increased our EPS estimate to Rs23.1 from Rs17.6.
􀂃 Target price – marginal change: We upgrade our target price marginally to Rs251 in spite of earnings revisions for two reasons: first, we have reduced holdings in Australian mines from 85% to 82% to account for stock options; and second, reduced coke margins are leading to lower values for Indian business.
􀂃 Upsides remain from better mine production: With coking coal becoming highly valuable, the earnings from the mines will account for 74% in FY3/09 and 77% in FY3/10 from a negative contribution this year. Increased production is a possibility (please see our note 'Reporting from the ground' dated 26 March 2008 for details).
Earnings revision
􀂃 We have adjusted our EPS estimates for FY3/08–FY3/10 by -25%, -21% and 31% to Rs5, Rs13 and Rs23.1, respectively.
Price catalyst
􀂃 12-month price target: Rs251.00 based on a Sum of Parts methodology.
􀂃 Catalyst: Increased mine production and rising coke prices.
Action and recommendation
􀂃 Maintain outperform: We believe GNC provides a good opportunity to ride the strong coking coal cycle. With increased visibility from the development of the mine, it has the potential to get substantially re-rated over the medium term. With the potential for earnings growth of 160% in FY3/09 and 78% in FY3/10, we believe the stock is attractively valued at just around 10x PER on our DCF- based target price
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