Coal India (CIL) reported 10% production growth and 15% off take growth y-o-y in September 17 due to the low base in FY17 as well as restocking of coal at power plants.
Coal India (CIL) reported 10% production growth and 15% off take growth y-o-y in September 17 due to the low base in FY17 as well as restocking of coal at power plants. With the recovery in off take growth in Aug-Sept’17 the 2Q17 off take growth is 14% which should reflect positively in earnings. Additionally, the YTD FY18 growth till Sept’17 now stands at 0.9% for production and 8 % for off take despite negative growth in 1Q18. Production growth is lower than off take as CIL is depleting its stocks estimated to be around 50mnT.
Coal stocks at power plants have been steadily falling over the past 12 months as states have been delaying coal procurement, given slower-than-expected power demand growth, which currently stands at 5 %-6 %.
However, coal stocks at power plants reached a critically low level at 6 days as of September17 vs 16 days in April17 and against a regulatory mandate of 21 days.
Hence, restocking of coal at power plants along with new plant additions (mainly 3GW from NTPC) are expected to lead to steady off take growth for CIL in the near future. We currently estimate 4.5% off take growth for FY18, with limited impact from mine degradation on coal realisations, in line with 1Q18 results, which saw flattish FSA realisations.
Key challenges for CIL remain wage hikes, which will inflate employee costs. The negotiation with workers unions is yet to reach a conclusion. After the finalisation of wage hikes, it is expected that CIL will raise prices to offset the hit from a higher wage bill. Once we cross these near-term challenges, the stock will be driven primarily by growth in offtake volumes, mainly driven by demand from the power sector.
We remain bullish on the stock from a long-term perspective as even with 6%-7% volume growth, CIL can deliver higher earnings growth given the low FY17 base and operating leverage benefit.
However, for this to pan out, we will need to cross near-term hurdles such as wage hikes and realisation impacts of mine degradation.