Coal India rating buy by Jefferies

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Published: January 13, 2018 1:33:15 AM

Post steep hike in non coking coal FSA prices by CIL, we lift our FY18-19E EPS 6-40%.

Coal, CIL, Coal India, FSA pricesPost steep hike in non coking coal FSA prices by CIL, we lift our FY18-19E EPS 6-40%. (Image: IE)

Post steep hike in non coking coal FSA prices by CIL, we lift our FY18-19E EPS  6-40%. We upgrade CIL to Buy from Hold as the price hike along with recent evacuation charge should more than offset wage hike and lead to margin expansion. Restocking at power plants should drive offtake growth near term. We expect EPS to grow at 30% EPS CAGR over next two years. At 6.8x Ebitda ex OBR, valuations appear attractive. Stock also offers 5% dividend yield potential. Price revision to lift average FSA realisation by 10% CIL has raised FSA prices for lower grade coal (3300-4300 kcal/Kg) by  15-18%, while it has cut prices for high grade coal (over 6400 Kcal/kg) by 2-5%. Effectively, this implies around 10% hike in average FSA prices. CIL also announced evacuation charge of Rs 50/ton on  Dec 19th, which could add 3.5-4% to revenue. Factoring these, we raise blended ASP by 2.5-8.5% over FY18-20e.

E-auction prices to stay supported Low coal stocks at power plants, diversion of coal to power sector has tightened coal supply for non power sector, leading to higher e-auction premiums. E-auction premium in November was 35% over notified prices vs. 22% over April-November. We believe E-auction coal demand should improve as activity levels pick up and also due to better demand from end use sectors (cement/DRI/Al), but e-auction coal supply should improve as well as output at Coal India limited (CIL) improves. We forecast e-auction prices of Rs 1,632/ton in  FY18 and Rs 1,704/ton in FY19e (Rs 1,536 /ton FY17). Volume to grow at 7.3% CAGR over FY17-20e Restocking at power plants has supported 10% y-o-y offtake growth post Q1. With coal stocks at 9 days (historic average 12 days), we expect restocking to continue near term, though offtake growth could moderate y-o-y due to much stronger base in Q4. We expect power generation growth to support 7.3% volume CAGR over FY17-20e.

Improving earnings trajectory  and FCF outlook CIL’s earnings over last 12 months have been hit by grade reset and wage hike. Negative news is now behind us. We believe price hike should drive 33% Ebitda CAGR over FY18-20 and generate FCF of Rs 66-100 bn over FY19-20e. This could support 4-5% dividend yield over FY18-20e. Valuation/Risks  CIL is trading at 6.8x FY19e Ebitda ex OBR, a discount to historic average (7.9x ex post). Our revised DCF based PT of Rs 350 (Rs 253), implies 7.9x FY19E Ebitda ex OBR. Key risks: slower volume growth, higher than expected hike in contractual costs; overhang due to potential government stake sale. Sharp increase in prices Coal India has revised non-coking coal prices across grades effectively implying a 9.5% hike in blended FSA prices.

In addition, it has announced evacuation charges of Rs 50/share. Coal India expects price hike to boost revenue by Rs 64.2 bn and evacuation charge to boost revenue by Rs 25 bn. We estimate the price revision and evacuation charges should more than offset the cost increase due to the wage revision.


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