Neutral on CIL, earning outlook remains weak

Updated: Mar 7 2014, 10:45am hrs
We reiterate neutral rating on Coal India (CIL) with a target of Rs 271 per share as earnings are likely to remain under pressure with no significant increase in production in near term.

We do not expect any multiple re-rating despite low valuations. Upside is expected to come from earnings. The stock is more of a dividend play with a yield of c6% assuming 60% pay-out in FY15-16. Our target price implies a FY16e PE of 10.1x and 6.2x FY16 EV/ebitda versus FY15 P/E of versus 10.3x and EV/ebitda of 5.7x. We use combination of DCF, PE and PB to value the company.

Volumes have disappointed again. CIL reported flat y-o-y production growth in February at 42.6 million tonne (MT) which was 2.8 MT less than the target for the month; resulting in a total shortfall of 20 MT year-to-date against our expectation of 21 MT for the year (461 MT versus company target of 482 MT). Main shortfall is from Central Coalfields (CCL) and Mahanandi Coalfields (MCL). Importantly off-take continues to be lower than production indicating demand side pressure as well. We note that utilisation at power plants has remained low and coal stocks were higher at 13 days in January-February 2014 compared with eight days last year on an increased capacity of 109 GW (up 11% y-o-y).