Given inventory build-up, e-auction premium could dip, posing a threat to profitability; risk-reward is favourable; ‘Hold’ retained.
Coal India’s (CIL) shipments rose 3% y-o-y to 51.5mt in February, 2019. Key highlights: (i) shipments of large subsidiaries—MCL and SECL—rose 2% and 4%, respectively; (ii) production grew 6.5% y-o-y to 58.1mt led by MCL and SECL; and (iii) pit-head inventory estimated at 35mt as of February end leading to improved coal availability. Going ahead, we expect: (a) CIL to report 4.5% y-o-y growth in shipments in FY19; and; (b) e-auction premium could dip given the inventory build-up. Maintain Hold with `243 target price. The stock is currently trading at 9.5x FY21e EPS.
Production picks up, inventory estimated at 35mt
CIL’s February, 2019 shipments rose 3% y-o-y to 51.5mt, with production rising 6.5% y-o-y to 58.1mt. For us, the greatest succour is 4/17% uptick in MCL’s (major subsidiary) shipments/production volume in February. Local issues at SECL also seem to have eased as its shipments/production rose 2/6%. On production outpacing shipments for fourth consecutive month, we estimate inventory at 35mt as of February end. We envisage non-regulated end users to benefit from the improved coal availability.
E-auction premium likely to dip
We expect e-auction premium (113% over FSA coal) to progressively dip as a result of: (i) higher coal inventory; and (ii) lower imports by China, resulting in imports finding their way to the fast-growing Indian market. However, e-auction revenue is still pegged at `40-50 bn per quarter as volumes are likely to pick up.
Outlook and valuation: Volume uptick a positive; maintain ‘HOLD’
We perceive the rise in shipments at major subsidiaries as positive as this will aid CIL’s volume going ahead. Though higher inventory could result in e-auction premium eroding from the current level, it will be beneficial for consumers, especially non-regulated ones. At CMP, we find risk-reward favourable for CIL. We maintain ‘HOLD/SP’ with target price of `243 (exit multiple of 9.9x FY21e EPS).
We see waning e-auction premium as a threat to Coal India’s profitability. Further, volume growth might get further muted if imports scale up owing to international prices (particularly for Indonesian 4200 kcal coal) coming down in recent times. Slow progress on evacuation infrastructure is another concern. We see dividend yield of 6-7% as support for the stock.
o Lower than expected new FSA demand
o Loss of volume-linked incentive
o Lower-than-expected volume growth
o Rise in international coal prices
o Sharp increase in costs without immediate increase in prices
Company description: Coal India Ltd (CIL) is an India-based holding company. The company is a coal mining company, which is engaged in the production and sale of coal. The company offers products, including Coking Coal, Semi Coking Coal, Non-Coking Coal, Washed and Beneficiated Coal, Middlings, Rejects, Coal Fines/Coke Fines, and Tar/Heavy Oil/Light Oil/Soft Pitch. CIL operates through approximately 82 mining areas spread over eight states of India.