Coal India - Minimal upside - IDFC

Coal India's (CIL) recent price hike comes as a positive and marginally mitigates our long-pending concern on weak pricing power. However, we see operating cost/ tonne rising by 3% over FY13-16 vs a 1.8% increase in blended realization/ tonne, which implies margin pressure. Also, the current rate of offtake appears to be unsustainable beyond FY14 due to rake crunch and production growth to remain subduded on target slippages by CCL and MCL (accounting for 60% of new capacity). While CIL's valuations are in line with global peers, we expect muted earnings growth (4% CAGR over FY13-15E). Reiterate Underperformer with a revised price target of Rs331.

Volume growth a challenge post FY14E: Offtake grew 7.4% in FY13, and we believe it is unsustainable beyond FY14. To meet its offtake guidance of 615m tonnes in FY17, CIL would need another 100 rakes/ day from 186 currently - a tall order. Thus, we estimate a 4% CAGR in offtake over FY13-17. Also, we see production growth rate subsiding given that ~60% of incremental volumes will likely come from two subsidiaries - CCL and MCL, where production targets have been underachieved for the last four years.

Margins under pressure: We believe the recent increase in prices will partially be offset by lower non-FSA prices, attributable to lower coking coal prices and declining share of e-auction coal in sales. In addition, operating cost per tonne is estimated to increase by 3% over FY13-16 against a 1.8% increase in blended realization per tonne. Resultant, we expect operating margins to decline from 26.5% in FY13 to 25.3% in FY16.

Muted earnings growth; maintain Underperformer: At CMP, valuations are largely in line with global peers (11x FY15E EPS and 6.8x EV/EBITDA). However, earnings growth would be muted (4% CAGR over FY13-15E) due to limited upside in realization and margin pressure. We maintain Underperformer with a revised price target of Rs331 (7x FY15E EV/ EBITDA).

Source : Equity Bulls

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