Coal India’s adjusted Ebitda is likely to rise at a 12.8% CAGR to Rs 38,600 crore by FY20, largely benefiting from operating leverage, transparent pricing for the non-power sector and 10% volume CAGR.
In the recent analyst meet, the management reiterated its focus on growing production. We value the stock at Rs 439, based on DCF valuation (WACC of 12.8%).
The stock is trading at an EV of 6x FY17E adjusted Ebitda. Even if we were to cut e-auction prices by 8% in view of falling Richards Bay Index to ~$50/t (v/s est of $55/t for FY17E), Coal India will still deliver an EPS of R23.8/share in FY17; this will ensure a minimum dividend per share of INR17- 18/share at 90% payout, which implies an attractive dividend yield of 5.1% at the minimum.
We believe the e-auction prices and demand will recover along with recovery in domestic Industrial activities. The current stock price is factoring in very low coal prices corresponding to an RB Index (6000 Kcal/t) lower than $40/t. At RB Index of $40/t, the DCF value is arrived at Rs 345/share.
Coal India dispatches in September 2015 grew 15% YoY to 40.4mt, the best ever monthly growth. YTD dispatch growth now stands at 9.3% YoY, tracking our full-year growth estimate of ~9%.Production in September grew 6.6% YoY to 37.2mt, with YTD growth now at 8.9%. Encouragingly, media articles report that overburden removal for the six months ended September is up a massive 37% YoY — a pre-cursor to strong production volume growth ahead.
We believe the sharp jump in dispatches during the quarter is partly attributed to weaker monsoon and higher dispatches to the non-power sector.
Our analysis of India’s coal consumption suggests that the decline in e-auction realisation is not only a factor of lower global thermal coal prices, but could also equally be due to fall in domestic coal consumption.
India’s coal consumption (implied based dispatches by Coal India, SCCL and captive mines, imports and inventory change at IPPs) fell ~13mt (or 3.8%) YoY to ~317mt during Apr-Aug; despite the demand headwind, Coal India’s dispatches grew 9% during the same period.
Demand weakness is more evident in the non-power sector where consumption is down ~14mt YoY to ~129mt. Demand from the power sector grew marginally to ~188mt.
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