INSUBCONTINENT EXCLUSIVE:
Motilal Oswal Securities has a buy call on Coal India with a target price of Rs 338.
The current market price of Coal India is Rs
234.50.
Time period given by brokerage is one year when Coal India price can reach defined target
It has reached a point where growth of dispatches will suffer not only in FY19E, but also in FY20E
COAL builds inventories during 2H of any financial year in order to meet demand in 1H of next financial year, when production is usually
lower due to seasonally high heat followed by monsoons
Our channel checks suggest that COAL is unlikely to surprise positively in remaining three months of FY19E
SECL is struggling with production growth
Therefore, it has become inevitable that we tone down our expectations
We are reducing our sales estimates by 1 per cent/2 per cent to 612mt/645mt for FY19E/FY20E.
Power plants restocking demand squeezing high
margin E-auction volumes: Low inventory level at power plants is another factor that will impact earnings of COAL because more coal will be
dispatched to power plants on priority basis, which will leave behind lower tonnage for high margin E-auction
Although low inventories at power plants in FY18 was a result of voluntary destocking during FY17, lower level in FY15 and FY19 are a result
of slower-than-expected growth in domestic coal production
Coal dispatches grew 12 per cent in FY18 and continue to grow at 11 per cent so far in FY19E
Since inventories at power plants remain low, restocking demand will continue to drive higher demand in FY20E as well
Therefore, we need to reduce E-auction volumes by 3 per cent to 79mt in FY19E and by 25 per cent to 69mt in FY20E
A scarcity of coal for non-power will ensure that E-auction prices remain high
Therefore, we are increasing E-auction realization by 10 per cent to Rs 2200/t for FY20E, which is still a decline of 12 per cent
YoY.
Reducing earnings by 5-7 per cent; valuations are attractive: We are reducing adj
EBITDA estimates by 5 per cent/6 per cent to Rs 242/274b for FY19E/20E on combined impact of reduction in volumes and increase in E-auction
prices as discussed above
EPS is reduced by 5 per cent/7 per cent for FY19E/20E
Stock is trading at an attractive valuation i.e
EV/EBITDA of 4.6x/4.1x, P/E of 9.2x/8.3x and dividend yield of 8 per cent/9 per cent at 90 per cent payout ratio in FY19E/20E
Adjusted EBITDA is expected to increase at CAGR of 16 per cent over FY18-20E on high operating leverage driven by 5-6 per cent volume growth
and cost reduction on high natural attrition
We maintain BUY and value stock at Rs 338/share based on EV/EBTIDA of 6.5x, in line with valuation of mining stocks.
