Coal India, rating: Hold, Volumes fall trend reversed

By: | Published: December 10, 2016 6:29 AM

CIL's volumes grew y-o-y, the first time since July 16, as impact of monsoon has faded and de-stocking at power plant appears to have ended.

Demonetisation impact on volumes appear limited in Nov (Reuters)Demonetisation impact on volumes appear limited in Nov (Reuters)

CIL’s volumes grew y-o-y, the first time since July 16, as impact of monsoon has faded and de-stocking at power plant appears to have ended. We believe volume growth could improve in 2H due to restocking. Higher coal prices should support e-auction prices in H2. Yet, we maintain Hold as a) earnings growth should remain muted given expected wage provision hike; b) near-term triggers are absent and c) valuations at 7.4x EBITDA (ex OBR) would cap upside potential.

Volumes grow y-o-y in Nov

Production grew 5.3% y-o-y (0.7% YTD FY17) and offtake grew 6.2% y-o-y (-0.2% YTD FY17). Demonetisation impact on volumes appear limited in Nov. Destocking at power plant had affected coal offtake in H1FY17, but power plant coal stocks (3% month-on-month) are now at 14 days (lowest since March 2015). We believe restocking and seasonally higher mix of coal-based generation in H2 should support better coal demand in H2. Nevertheless, CIL would require to deliver 13.5% y-o-y offtake growth in remaining 4 months to meet our FY17 off- take growth forecast of 4.6% y-o-y. We believe this could be tough.

Thermal coal imports should continue to fall

Coal imports fell 24% y-o-y in Nov. Coal imports by power utilities using imported coal for blending (25% of FY16 imports) have almost halved on a y-o-y basis. Imported coal (ex port) is now almost 1.6x e-auction coal price (ex mine) and 2.5x linkage coal price (ex mine). Also, central and state PSUs plan to limit thermal coal imports. Thus slide in coal imports should continue, in our view.

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Spot e-auction premium remains stable

E-auction premium over notified price for spot e-auction was stable (m-o-m) at ~23% in November, as per ICMW data. Average e-auction price in spot e-auction was Rs 1627/ton, almost flat MoM basis. We believe e-auction prices should be supported by higher global coal prices. However, potential impact on DRI sector (consumer of e-auction coal) due to demonetisation, could impact demand from non power sector. We expect supply overhang to cap upside to e-auction prices. We forecast average e-auction prices of Rs 1,607/ton in FY17 and R1,680/ ton in FY18E (1QFY17 Rs 1,570/ton).

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