Uptick is likely from Q3; while FY20 growth target is high, dividend yield and free cash flow are positives; ‘Buy’ retained
Coal India (CIL) has reported a 10% y-o-y decline each in August production and sales volume, now down to their lowest levels in the past three years. Key highlights: (i) Larger subsidiaries MCL (Mahanadi Coalfields Ltd) and SECL (South-Eastern Coalfields Ltd) accounted for the bulk of the decline; (ii) continued low rake availability – down to 178/day in August from 205/day in July—dampened offtake; (iii) production volume was hit by fatalities at MCL and SECL and higher-than-normal rainfall. That said, we expect an uptick in production/offtake Q3 onwards as: (i) weather-related issues subside; (ii) rake availability improves; and (iii) production normalises at MCL and SECL.
Hence, we do not believe our FY20e volume growth of 4.6% is at risk, but note that CIL’s target of 8.5% is daunting. That said, a healthy dividend yield and free cash flow are positives. Maintain Buy with a TP of Rs 235 (8.6x FY21e EPS).
August production/offtake disappoint CIL’s August 2019 production and offtake volume decline is the worst in the past three years. Production and offtake slid 10% y-o-y each to 34.8mt and 40.5mt, respectively. Key highlights: (i) Production at MCL was impacted by about 3mt owing to fatalities in late July; (ii) SECL’s production was impacted by fatalities due to a mine accident on 20 August, not to mention the delay in finalisation of subcontracts; and (iii) production at WCL (Western Coalfields Ltd) dipped owing to higher-than-expected rainfall in August. On the offtake front, lower rake availability led to loading of 178 rakes/day compared with 205/day in July 2019.
Minimal risk to our production/offtake estimate
In our view, CIL is likely to turn in production/offtake growth of 4.5/4.6% in FY20 led by: (i) resolution of subcontracting issues at SECL; (ii) production normalisation at MCL; and (iii) improvement in rake availability. We see CIL’s internal target of 660mt, which implies 15% y-o-y growth for the rest of FY20 – as daunting.
Outlook and valuation: Production woes likely over; maintain ‘BUY’
We expect CIL’s production/offtake volume to show an uptick Q3FY20 onwards mainly due to a pick-up in business at MCL and SECL. While BCCL (Bharat Coking Coal Ltd) remains a concern, we do not believe our FY20e offtake of 638mt is at risk. Maintain ‘BUY/SO’ with a target price of Rs 235/share. The stock is trading at 6.8x FY21e EPS.