| Coal India (COAL IN) Analyst meet takeaways: 150mt prod increase over FY15-17 dependent on 30K ha land acquisiton and Railway line const | Neutral Price Target: Rs320.00 PT End Date: 31 Mar 2015 | |
What would COAL need to do to achieve 150MT prod growth over the next 3 years: The Chairman (as per media reports in the ET, he is expected to leave COAL soon and join the administrative section in the new state of Telangana) in the analyst meet highlighted that for production to increase by ~50mt per year for the next 3 years, COAL needs to acquire ~10,000 hectares of land every year (8k non forest and rest forest) vs average of 4,000 hectares acquired in each of the last 2 years. Forest and Environment clearances need to be received for all the projects, and lastly the 3 railway lines need to come up in the next 2 years.
Acquiring such large quantities of land and expecting the Railways to complete the much delayed lines in the next 2 years looks difficult, in our view
FY15 prod target of ~50mt increase- what it is dependent on: As per COAL, 20Mt has to come from MCL, 10MT from SECL and the rest from other subs. Railway rakes per day need to increase to 220 per day vs 196 in FY14 (FY13 stood at 190). Interestingly management highlighted that the entire increase in coal production needs to go to the power sector unless they are unable to pick up the coal. ~20-25mt of the prod increase would come from the Jan14 directive by the MOEF on allowing higher prod from existing mines.
FY14 highlights: Surprisingly e-auction volumes went up sharply in FY14 (58mt), which management attributed mainly to evacuation constraints. This should come off in FY15. FSA coal prices, adjusted for incentives increased in Q4 and the impact from grade slippages is behind us.
Wage cost increase expected to moderate in FY15, no comments on potential price increases, dividend policy:COAL expects wage cost increase of 2-3% as employee cost reductions should offset most of the inflation related wage cost spike. FY14 had a Rs5bn benefit from higher interest rates in the actuarial valuations. COAL did not comment on the potential price hikes or dividend policy going forward.
Investment Thesis
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. However, we believe that further re-rating will depend on FSA pricing trend, ability to take price hikes, and import requirements. In addition, COAL has a 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 could go higher, and b) a stated payout policy could be put into place, thus allowing investors to view COAL as a yield play.
Valuation
Our Mar-15 price target of Rs320 is based on 6.5x FY16E EV/EBITDA, a 5% discount to global peers given lower volumes for market priced coals. Our target multiple of 6.5x is based on improved visibility on production growth.
Risks to Rating and Price Target
Key upside risks include: a) larger than ~5% price increase 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 non-productive use.
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