Neutral on CIL, volume growth worries remain

Updated: Apr 2 2014, 21:57pm hrs
After our meeting with Coal Indias senior management, we understand clearances, land acquisition and evacuation issues still remain key hurdles.

Production of 550m-560m tonnes is feasible by FY17. Price hike benefit is eroded by grade slippages and old inventory liquidation; a review is likely in 1HFY15. Moderate cost pressure would remain.

For 11M FY14, production/dispatch growth was 2.8%/1.7% y-o-y, marred by lack of clearances, short-supply of explosives, poor demand from Discoms and climatic conditions. The target of 42 million tonne production growth by FY15 appears optimistic in our view, given CILs track record (FY10-14E CAGR of 2%) and several issues even for brownfield projects.

If land acquisition is brought under the purview of LARR (Land Acquisition Rehabilitation and Resettlement Act), it could pose yet another challenge. Currently, land acquisition by CIL is covered under the Coal Bearing Area Acquisition Act (CBA).

Progress on critical railway lines is slow and possible benefit in the 12th plan period would be low. Pricing gain eroded; review possible in FY15: Benefit of price hike taken by CIL in May 2013 (potential benefit of R2,000 crore in FY14) has been muted due to grade slippages (~2%) and old stock liquidation. We cut FY14 volume estimate by 5-7 million tonnes. We expect CIL to report earnings CAGR of 1% in FY13-15 (FY15E earning growth being 6.6%). However, possible challenges in volume growth and lack of earnings drivers may limit upside. We remain neutral on the stock.

Motilal Oswal Fin Services