No dates have been finalized as of now for the COAL stake sale, and there is no
finality if the stake sale would happen in the current fiscal. The stock has
significantly underperformed Indian mining names on a combination of a):
operational disappointments and b) stake sale overhang. While we maintain our
structural cautious view on the stock given the regulatory issues are yet to be
sorted out, we see positive news flow on: a) dividends, with a large part of
dividends to come through over the next 3 months and b) closure of the stake
sale overhang by Jan end. We maintain our Jun-14 PT of Rs310, which implies
15% potential upside from current levels.
A trade at current levels? We think so: As we have highlighted in our
research previously, COAL offers a good trading range, with dividend yield as a
support for the stock. We maintain our structural cautious view on the stock, as
we remain unsure as to what the steady state profitability of COAL would be
once supplies start on all the new Fuel Supply Agreements (FSA). However the
sharp underperformance vs the index (YTD down ~32%) and peers like TATA
(-13% YTD) can see some reversion as: a) dividends get announced (last year
was in March) and b) stake sale overhang gets over. The current Dividend yield
is ~6%, and there is a strong likelihood, in our view, of dividends being
increased this year, which effectively puts a floor on the stock price.
Why we remain structurally cautious on COAL: COAL’s production growth
remains anaemic and is likely to miss FY14E official targets. The issue at the
Talcher mines has not been helpful. On the other hand, supply commitments
continue to increase, with media reports (ET), quoting the Chairman, that FSA
have been signed for ~71GW of power capacity out of the 78GW on the list.
Eventually, over the next two years, these power plants are likely to have Power
Purchase Agreements (PPA) in place, which means COAL would need to supply
~65% of the agreed quantity from its own production. Given the lack of
production growth, the implications on current profitability are yet to be
ascertained.
Is there downside risk to our FY14-15E numbers: Yes there is: As we
highlighted in our recent results update, we wait for more clarity on the supply
commitments, before we adjust our numbers, and hence agree that there is some
downside risks to our earnings estimates.
Can a trade still work with consensus earnings being cut? The support for a
short-term trade comes from a) Investor Positioning, which has moved away
from the stock aggressively and b) Dividend/Stake sale news flow.
��
finality if the stake sale would happen in the current fiscal. The stock has
significantly underperformed Indian mining names on a combination of a):
operational disappointments and b) stake sale overhang. While we maintain our
structural cautious view on the stock given the regulatory issues are yet to be
sorted out, we see positive news flow on: a) dividends, with a large part of
dividends to come through over the next 3 months and b) closure of the stake
sale overhang by Jan end. We maintain our Jun-14 PT of Rs310, which implies
15% potential upside from current levels.
A trade at current levels? We think so: As we have highlighted in our
research previously, COAL offers a good trading range, with dividend yield as a
support for the stock. We maintain our structural cautious view on the stock, as
we remain unsure as to what the steady state profitability of COAL would be
once supplies start on all the new Fuel Supply Agreements (FSA). However the
sharp underperformance vs the index (YTD down ~32%) and peers like TATA
(-13% YTD) can see some reversion as: a) dividends get announced (last year
was in March) and b) stake sale overhang gets over. The current Dividend yield
is ~6%, and there is a strong likelihood, in our view, of dividends being
increased this year, which effectively puts a floor on the stock price.
Why we remain structurally cautious on COAL: COAL’s production growth
remains anaemic and is likely to miss FY14E official targets. The issue at the
Talcher mines has not been helpful. On the other hand, supply commitments
continue to increase, with media reports (ET), quoting the Chairman, that FSA
have been signed for ~71GW of power capacity out of the 78GW on the list.
Eventually, over the next two years, these power plants are likely to have Power
Purchase Agreements (PPA) in place, which means COAL would need to supply
~65% of the agreed quantity from its own production. Given the lack of
production growth, the implications on current profitability are yet to be
ascertained.
Is there downside risk to our FY14-15E numbers: Yes there is: As we
highlighted in our recent results update, we wait for more clarity on the supply
commitments, before we adjust our numbers, and hence agree that there is some
downside risks to our earnings estimates.
Can a trade still work with consensus earnings being cut? The support for a
short-term trade comes from a) Investor Positioning, which has moved away
from the stock aggressively and b) Dividend/Stake sale news flow.
Coal India (Neutral; Price Target: Rs310.00)
Investment Thesis
While we like CIL’s long-term story of volume growth and improving realizations,
and the scarcity premium means the company is likely to trade at a significant
premium to sector valuations. We believe that further re-rating would depend on
FSA pricing trend, ability to take price hikes and import requirements. In addition,
COAL has very large FCF, a strong cash-rich balance sheet and minimal capital
spend requirements. While dividends have been high in the last two years, in our
view, a) they can be taken higher and b) a stated payout policy can be put into place,
thus allowing investors to view COAL as a yield play.
Valuation
Our Jun-14 price target of Rs310 is based on 5.5x FY15E EV/EBITDA
given the lower contribution from market priced coal going forward.
Risks to Rating and Price Target
Key upside risks include a) larger than ~5% price increases in power coal sales;
b) special dividend and/or higher than 45% payout; and c) large volume increase.
Key downside risks include a) no price increase on power coal sales; b) sharp
reduction in e-auction coal sales to supply to new FSA; and c) usage of cash in nonproductive use.
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