Coal India rated ‘Reduce’; Kotak says volume momentum has been sustained

Coal India reported a steady 4.8% y-o-y growth in volumes, more impressive given the leap-year advantage during the same period last year. The volume performance has improved over the past four months taking dispatch growth to 1.5% YTD and setting up Q4FY17 as the best quarter in the current fiscal. Improving e-auction premiums and revised coking coal prices will further boost Q4FY17 earnings, even as the Street keeps an eye on the dividend payout to be declared early next week. Maintain Reduce with target price of R320/share.

Dispatch growth of 4.8% y-o-y despite leap-year handicap, Q4FY17 slated to see improvement

Coal India reported reasonable dispatch growth of 4.8% y-o-y for the fourth consecutive month, improving YTD dispatch growth to 1.5%. The performance should be seen in the context of the leap-year disadvantage (3.6%), and will likely mark the best quarterly performance for CIL in the current fiscal (5.5% y-o-y growth on current run rate). We note that March 2016 marked the start of weakness in dispatch growth (+3.6% y-o-y) that continued well up to October 2016. However, we highlight a potential disruption to supplies as four large labour unions have threatened non-cooperation and disruption of work that could likely impact coal dispatches in the first week of March.

Also Watch:

On a subsidiary-level performance, MCL (-4.9% y-o-y, +2.7% YTD) and BCCL (-8.4% y-o-y, -3.2% YTD) remain the laggards while CCL (+16.4% y-o-y, +0.3% YTD) and WCL (+18.1% y-o-y, -8.7%YTD) have shown an improved performance during the month. NCL has been a consistent performer with 7.9% y-o-y growth during the month improving on its YTD performance of +6%.

Price trends looking up, demand data from power not as encouraging

Firm trend for e-auction coal (31.5% in January 2017) and revision in prices of coking coal from January 2017 keep us upbeat on realisations from Q4FY17 onwards. However, weak off-take from the power sector (-8% y-o-y in January 2017) keeps us worried, especially as coal-based generation grew at 4.6% y-o-y in January 2017. We do highlight that inventory liquidation only partly explains the decline.

Dividend eyed in short term

In the short term, investor focus will likely be on the payout of interim dividend (R27.4/share). We do not rule out a lower dividend payout owing to decline in earnings during the current fiscal and a higher capex. In the medium term, uncertainty on the wage revisions could keep stock performance in check.