CIL on track to achieve offtake volume growth estimate for FY16
Coal India has reported production of 47.5mt for November 2015 (up 7% y-o-y), driven by production growth of more than 10% by MCL (Mahanadi Coalfields Ltd) and CCL (Central Coalfields Ltd). MCL reported the strongest production growth of 13.9%, followed by CCL (12.3%) and NCL (Northern Coalfields Ltd) (9.4%). For November 2015, offtake growth was at 9%, driven by more than 10% growth at two subsidiaries—MCL and SECL (South Eastern Coalfields Ltd). Offtake growth for eight months of FY16 remains strong at 9.8% and we believe the company is on track to achieve our FY16 offtake volume growth estimate of 9.6%. Production in November 2015 was 2.1mt higher than offtake and we expect this trend to continue, as destocking of ~22mt in first half of FY16 is likely to be re-built over in the second half of FY16. Although the impending OFS (offer for sale) remains an overhang, we remain BUYers on the back of structural improvement in production growth trajectory and inexpensive valuations (13.5x FY17E P/E).
Estimates for FY16/17/18:
* Production: We factor in offtake volumes of 537/579/637mt over FY16/17/18E, implying offtake CAGR of 9.2% over FY15-18e (estimates).
* E-auction volumes: We factor in e-auction volumes of 59mt in FY16, 9.6% of total offtake volumes. We factor in conduct of auction of non-power linkages upon expiry of linkages. We also factor in 25% of incremental volumes to be sold under non-power linkages over FY17-20e. As a result, we factor in e-auction volumes of 90mt in FY17 and 124mt in FY17.
Valuation and recommendation: Coal India remains one of the best large-cap reform plays in India and our preferred play amongst Indian metals and mining companies. We reiterate our BUY stance on CIL, as: (i) we expect production growth over the next ten years to be higher than CIL’s CAGR of 5% and (ii) partial completion of three key railway lines over the next 3-4 years to drive volume growth to 10% CAGR thereafter (over FY18-24).