Coal India :Production growth decelerates post April 􀂄 BofA Merrill Lynch,

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C oal India Limited
Production growth decelerates
post April
􀂄 Output growth slow post April, Maintain Neutral
Post strong volume growth in April, CIL’s production & off take growth has slowed
over past 2 months partly led by heavy rains/monsoon. We expected deceleration
in volumes due to monsoon, but volumes are lagging our forecasts by ~2-3%YTD
(FY). We est. CIL off take will need to increase to 7.7%YoY going forward to meet
our FY12 vol. growth est. of 7%YoY. A 1% change in volume would change EPS
by 1.5%. We maintain our est. & Neutral rating as 1) another price hike in FY12,
key to further outperformance appears unlikely; 2) CIL is trading at 9x FY12e
EBITDA. Our NPV based PO implies limited upside potential from current levels.
Production affected by rains, coal inventories lower
Output growth is tracking at ~2%YoY YTD FY12 (7%YoY in April). Off take growth
is tracking at ~5%YoY YTD (9%YoY in April). CIL’s coal inventories have declined
by 9-10mt since March (70mt) which is a positive. Average rake availability was
162 rakes/day in May/June vs. 177 rakes/day in April (155 rakes/day in 1Q). As
volumes are likely to improve mainly in 2H FY post monsoon, we estimate ~185
rakes/day will be required in 2H FY12e to meet our FY12 target.
Potential upside from lower wage provision
Wage revision is due in July 11, but wage settlement could take longer. We
expect CIL to provide for potential wage hikes post 1QFY12 & forecast wage hike
of 30% in FY12e. CIL may make lower wage provisions initially till visibility around
potential wage hike improves. A 1% lower wage cost increases EPS by 0.9%.
OBR adjustment removal deferred beyond 1Q FY12
Mgmt has indicated that it will provide for non cash over burden charges (OBR) in
1Q as approvals for OBR accounting policy change (targeted in FY12) is pending.
Our FY12 EPS assume no OBR costs (~7%of costs) & could be lower by 12% if
OBR provision continues in FY12. Cash flows/NPV should remain un changed.