As per industry data, e-auction realisations improved by 15-17% in October 2016 from lows in QE September 2016. In addition, CIL’s dispatches grew by 7% y-o-y in December 2016 (and 3% y-o-y in QE December 2016) vs 1% decline in F1H17, helped by improvement in thermal power production, which grew 9% y-o-y in November 2016, vs 7% in F1H17.
We expect CIL’s volume momentum to remain strong and estimate 7% growth in QE March 2017. With improvement in volumes, the company’s earnings should also reflect gains from operating leverage, given its cost structure (employee cost accounts for ~50% of total cost). This, however, is reflected in 18% EBITDA growth.
This coupled with expectations of dividend announcement in the next few months could support the stock in the near term.
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However, we continue to believe that the company has limited pricing power on linkage supplies (these account for 84% of its F16 total volumes), which coupled with looming wage hikes, will likely constrain the margin trajectory and earnings surprise vs. our estimated 19% EBITDA growth in F18.
With the rise in capex, CIL will have to cut dividend from F2016 levels. We continue to be UW on a 12-month perspective, relative to India metals and mining coverage. Our R268 price target is our base case scenario value, derived from a consolidated earnings-based residual income model with three stages.