Following our meetings with the CIL management over the past few weeks, we think that bulk of the bad news in respect of earnings downside is largely quantified and reflected in consensus earnings downgrades over the past few months and the 23% YTD correction in CIL’s stock price. Further, we believe that a revision in non-coking coal prices to partially recoup profitability to the extent dividends can be sustained close to historical levels is somewhat anticipated as well.
Building in a 4-5% blended FSA coal price revision and increasing contribution from washed coking coal sales with the start-up of new washeries, we expect profitability to recover, albeit from a lower base. One-year forward multiples are below historical 5-year averages but not at distressed levels. Building in DPS of Rs 14/Rs 18 in FY18F/19F, the yield at 5.5%/7.1% is healthy, but not compelling enough, in our view. Our SOTP-based TP drops by 19% to `260, implying a 12-month total return potential of 8%. Maintain Neutral.
Normalised EPS cut is cushioned by a sharp reduction in OBR; adjusted for the same, our FY18F/19F EPS forecast is cut by 16%/10%. While our FY18F/19F normalised EPS is 2-3% below mean consensus, we note that consensus forecast is spread over a wide range. Valuation multiples are below historical averages but in ‘neutral’ territory and the stock would continue to be looked upon as a ‘yield play’ around current levels as long as visibility of dividends sustaining between Rs 15-20/share is maintained.