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  1. Slow volume growth a risk Coal India faces, target Rs 405: Jefferries

Slow volume growth a risk Coal India faces, target Rs 405: Jefferries

Coal India Limited's (CIL's) EBITDA ex OBR grew 10%y-o-y (7% beat) in 3Q. Avg. realization dipped 1% q-o-q. FSA realization declined 1.4% q-o-q due to higher mix of coal from MCL (lower grade), higher mix of sales to power sector, lower realization on MOU.

By: | Published: February 13, 2016 12:00 AM

Coal India Limited’s (CIL’s) EBITDA ex OBR grew 10%y-o-y (7% beat) in 3Q. Avg. realization dipped 1% q-o-q. FSA realization declined 1.4% q-o-q due to higher mix of coal from MCL (lower grade), higher mix of sales to power sector, lower realization on MOU. E-auction ASP improved 4% q-o-q (8% ahead). E-auction mix was 11%. Costs were below our estimate due to lower wage and contractual costs. Overburden (OBR) provision rose sharply q-o-q, but was down 17% y-o-y.

Cabinet has recently approved policy for auction of linkages to non regulated sector which is broadly on expected lines. Key highlights are no premature termination of FSAs; 25% of incremental output to be auctioned and earmarking of volumes for sub-sectors. Maturity profile of existing non power FSA’s is not available, but we estimate coal linkages for 16 million tons may be put up for auction in FY17. If the auction price is near spot e-auction price, it may lift FSA realization by 0.5% in FY17 and by 2-3% over FY17-19E, as per our estimate.

Our price target of Rs 405 is based on DCF. CIL also offers 6% dividend yield potential. Downside risks: slower volume growth, lower e-auction prices and no FSA price hikes.

Coal India Limited’s (CIL’s) EBITDA ex OBR grew 10%y-o-y (7% beat) in 3Q. Avg. realization dipped 1% q-o-q. FSA realization declined 1.4% q-o-q due to higher mix of coal from MCL (lower grade), higher mix of sales to power sector, lower realization on MOU. E-auction ASP improved 4% q-o-q (8% ahead). E-auction mix was 11%. Costs were below our estimate due to lower wage and contractual costs. Overburden (OBR) provision rose sharply q-o-q, but was down 17% y-o-y.

Cabinet has recently approved policy for auction of linkages to non regulated sector which is broadly on expected lines. Key highlights are no premature termination of FSAs; 25% of incremental output to be auctioned and earmarking of volumes for sub-sectors. Maturity profile of existing non power FSA’s is not available, but we estimate coal linkages for 16 million tons may be put up for auction in FY17. If the auction price is near spot e-auction price, it may lift FSA realization by 0.5% in FY17 and by 2-3% over FY17-19E, as per our estimate.

Our price target of R405 is based on DCF. CIL also offers 6% dividend yield potential. Downside risks: slower volume growth, lower e-auction prices and no FSA price hikes.

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