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Coal India (COAL)
OW: Market is ignoring positives
Despite one-off 2Q production decline, we believe offtake will
grow at 5% in FY12e as production and logistics improve
Market ignoring strength of COAL’s earnings; EPS to grow at a
24% CAGR over FY12-14e, despite our 7-8% estimates cut
Even with clearer earnings visibility, stock is trading in line
with Indian & ASEAN peers; reiterate our OW rating with a
lower target price of INR415, down from INR469
2Q production decline due to excessive rains in August-September 2011 was one-off:
After factoring in the 2Q decline (11% yoy), we still expect FY12 offtake to increase by
5% yoy to 446MT vs. our previous and company target of 454MT (Exhibit 2). This is due
to: a) an improvement in production in 2H; and b) better logistics, as rake availability has
increased to 181/day at end-October 2011 from an average of 156/day (YTD-FY12).
Stock price has been disproportionately impacted by negative newsflow: The stock price
has declined c18% over last three months (against Sensex c3%), factoring in negative news
(Exhibit 1). Separately, investor concerns about the government using the surplus cash
(INR550bn at end-1HFY12, or INR87/share) in unrelated investments to meet its divestment
target are exaggerated, in our view. Even if we assume about INR200bn (50% of the
government target) is used up, it would result in a maximum TP cut of cINR32/share.
Market has ignored most positives: Earnings in 1H have been strong (EBIT up 49% yoy),
with ASPs improving due to better e-auction prices (up c40% yoy) and margin improvement,
despite flat offtake volumes. Also, the resumption of e-auctions in November 2011 went
ignored. Despite reducing our FY12-13 estimates by 7-8% to factor in the decline in
production and higher costs in 2Q (Exhibit 5), we still expect COAL’s EPS to grow at a 24%
CAGR over FY12-14 (Exhibit 6) on the back of volume growth (5%), ASP increase (9%),
mainly due to higher e-auction prices and margin improvement (780bp). There could be upside
to our e-auction volume and pricing assumptions, given demand pressure (Exhibit 3).
Stock trading in line with Indian and ASEAN peers: COAL is trading at a FY13 PE of 11x,
in line with Indian utilities (11.2x – trading at all-time low band) and ASEAN peers (10.6x)
(Exhibit 10-11), despite having a better return profile and greater earnings visibility. We
maintain our OW rating with a reduced target price of INR415 due to EPS estimate changes
and a lower target multiple. We benchmark our target PE multiple of 12.8x for COAL to large
Indian utilities (like NTPC and Powergrid) who have a similar cost-plus business model and
are currently trading at FY13 PE of 12.7x. Under our research model the stock is no longer
considered volatile. Downside risks are lower-than-expected offtake from logistics constraints
and implementation of the MMDR Bill, with COAL unable to pass on cost increases to its
customers
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India (COAL)
OW: Market is ignoring positives
Despite one-off 2Q production decline, we believe offtake will
grow at 5% in FY12e as production and logistics improve
Market ignoring strength of COAL’s earnings; EPS to grow at a
24% CAGR over FY12-14e, despite our 7-8% estimates cut
Even with clearer earnings visibility, stock is trading in line
with Indian & ASEAN peers; reiterate our OW rating with a
lower target price of INR415, down from INR469
2Q production decline due to excessive rains in August-September 2011 was one-off:
After factoring in the 2Q decline (11% yoy), we still expect FY12 offtake to increase by
5% yoy to 446MT vs. our previous and company target of 454MT (Exhibit 2). This is due
to: a) an improvement in production in 2H; and b) better logistics, as rake availability has
increased to 181/day at end-October 2011 from an average of 156/day (YTD-FY12).
Stock price has been disproportionately impacted by negative newsflow: The stock price
has declined c18% over last three months (against Sensex c3%), factoring in negative news
(Exhibit 1). Separately, investor concerns about the government using the surplus cash
(INR550bn at end-1HFY12, or INR87/share) in unrelated investments to meet its divestment
target are exaggerated, in our view. Even if we assume about INR200bn (50% of the
government target) is used up, it would result in a maximum TP cut of cINR32/share.
Market has ignored most positives: Earnings in 1H have been strong (EBIT up 49% yoy),
with ASPs improving due to better e-auction prices (up c40% yoy) and margin improvement,
despite flat offtake volumes. Also, the resumption of e-auctions in November 2011 went
ignored. Despite reducing our FY12-13 estimates by 7-8% to factor in the decline in
production and higher costs in 2Q (Exhibit 5), we still expect COAL’s EPS to grow at a 24%
CAGR over FY12-14 (Exhibit 6) on the back of volume growth (5%), ASP increase (9%),
mainly due to higher e-auction prices and margin improvement (780bp). There could be upside
to our e-auction volume and pricing assumptions, given demand pressure (Exhibit 3).
Stock trading in line with Indian and ASEAN peers: COAL is trading at a FY13 PE of 11x,
in line with Indian utilities (11.2x – trading at all-time low band) and ASEAN peers (10.6x)
(Exhibit 10-11), despite having a better return profile and greater earnings visibility. We
maintain our OW rating with a reduced target price of INR415 due to EPS estimate changes
and a lower target multiple. We benchmark our target PE multiple of 12.8x for COAL to large
Indian utilities (like NTPC and Powergrid) who have a similar cost-plus business model and
are currently trading at FY13 PE of 12.7x. Under our research model the stock is no longer
considered volatile. Downside risks are lower-than-expected offtake from logistics constraints
and implementation of the MMDR Bill, with COAL unable to pass on cost increases to its
customers
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