Stock corner: Maintain ‘buy’ on Coal India with target price of Rs 333

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Published: October 23, 2019 12:53:01 AM

CIL is looking to introduce VRS to reduce manpower expenses, especially in the underground mines which contribute 13% to the total production but employ 50% of the total workforce.

We remain positive on CIL over FY19-21E, with ~47% RoE trading at 6.0x PE and 4.0x EV/Ebitda on a FY21E basis.

We recently met Coal India’s senior management to understand the revised production targets for FY20E as its earlier target of 660 million tonne seems challenging since H1FY20 output was only 241 MT (down 5.6% y-o-y). The management stated the decline was mainly in August and September when some states faced excessive floods due to which most mines were shut. We have assumed 618 MT for FY20 in our estimates and expect dividends to improve compared to FY19. Maintain ‘buy’ with target price of Rs 333/share.

CIL has produced 241 MT in H1FY20 and is looking to achieve ~625 MT (growth of 3.6% y-o-y). Lower revised target is mainly due to the impact of excessive floods in Chhattisgarh, Jharkhand, Odisha and Maharashtra. With receding water levels, output has picked up in October and is expected to significantly ramp up from November. The contractual issue faced in SECL has now been resolved and although law and order situation at MCL continues to be volatile, major part of the issue has been resolved. For coal evacuation, two of the three critical rail links have commenced and are expected to become fully operational in the next 18 months. There is a good enough reason to believe that CIL, despite challenges, has the resilience to produce 35-40 MT incrementally annually going forward.

CIL is looking to introduce VRS to reduce manpower expenses, especially in the underground mines which contribute 13% to the total production but employ 50% of the total workforce. This will improve profitability. Blended pricing to be better y-o-y: FSA pricing has improved to Rs 1,370/tonne, up 4.4% y-o-y in Q1FY20. However, Q4 onwards, FSA premium should continue. We remain positive on CIL over FY19-21E, with ~47% RoE trading at 6.0x PE and 4.0x EV/Ebitda on a FY21E basis.

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