Coal India (COAL) FYTD Volume growth slowed to 5.5% while, the growth in August- December’18 was mere 1% despite severe shortage of coal, led by improved demand from power sector and pick-up in economic activity.
Overall volumes growth would remain weak for rest of FY19e and FY20e due to poor rail connectivity at newly commissioned mines and peaked out Road/Belt route. We factor in 4.8%/5.5% growth in FY19e/FY20e.
As happened in the past, margin rich E-auction volumes faced the brunt to meet the volumes tied-up in Power and Non-power FSAs. E-auction volumes/month fell by ~65% in Oct-Dec’18 to 2mn tonne (t) against average 6 mt.
Given the limited buffer for E-auction due to strong demand in FSA and low production growth, we expect e-auction volumes to fall to 4-year low at 65m/60m tonne in FY19-FY20e. Led by weak operational performance and rising headwinds due to govt policy on opening up the sector. We trim our multiple by 9% to 10xFY20e P/E and downgrade the stock to ‘Hold’ with a TP of `270 (`330 earlier).
Impacted by grade slippages, wage revision and elevated capex, COAL’s FCFE grew at a tepid CAGR of 2.5% over FY14-FY18 less than half of growth in volumes. We expect FCFE growth to languish between 2.0-2.2% in FY19e-FY21e due to stable earnings growth and high capex intensity with investments in non-core businesses like fertilizer and power plant.
Investors would start getting nervous in FY21e for the next wage revision due in July-2021. Hence, we believe that high dividend high is just a mirage built on weak earnings base.
Given the poor show by COAL, we strongly believe that the Centre would take decisive action by allowing the merchant mining and auction of more coal blocks for power and non-power sector. Admittedly, it is a time-consuming policy enabler; but it would pose a strong challenge to monopolistic stature of COAL’s operations.