Coal India - Volumes Push to Bring Cheer; Company Update ::Edelweiss

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We are optimistic on Coal India’s (CIL) volume growth trajectory and believe its offer-for-sale is a good opportunity to invest in the stock from a long term perspective. Our belief hinges on: 1) the government’s sharp focus on doubling CIL’s production by FY20 (implying 15% CAGR) to counter rising coal imports; 2) saving from low diesel prices (every INR1/litre drop in fuel cost saves ~INR1bn for CIL); and 3) our expectation of higher realisation in FY17 which will offset the impact of impending wage hikes. We raise our FY16 volume estimates by ~3%, and led by low fuel cost raise EBITDA estimates by ~6%. We introduce FY17 estimates with volume growth of ~8% (to 580mt) and earnings growth of ~19%. Rolling over to FY17E EPS, we continue to value CIL at 14x P/E.

Volumes to double by 2020

To counter rising coal imports, the government is focused on doubling CIL’s production to ~1bntpa by year 2020. The swiftness seen in facilitating procedures for upcoming auctions of the coal blocks (cancelled by the Supreme Court) instills confidence. A mine-wise production plan for the next five years is expected to be announced soon.      

Margins improvement ahead

Factoring low diesel prices (down ~18% from recent peak), we increase our FY16E EBITDA margin by ~100bps. While salary revision for both executives (w.e.f. January 1, 2017) and non-executives (w.e.f. June 1, 2016) is due in FY17, we expect CIL’s realisations to rise by ~10% thereby offsetting impact of the same and aiding another 150bps YoY expansion in margins. When the last wage hike was implemented in FY12, CIL’s blended realisation rose ~22% YoY while EBITDA/t increased by 14% YoY.

LINK
https://www.edelweiss.in/research/Coal-India--Volumes-Push-to-Bring-Cheer;-Company-Update/10005509.html