Coal India - Production/dispatch on track; cut to HOLD on limited upsides - Religare

For Sep'13, COAL's production (33.2mt, +15% YoY)/dispatches (35.8mt, +10% YoY) were ahead of our FY14E est, even as they were marginally below our est for H1FY14 at 4.7%/ 4.5% YoY growth. We believe the company is on track to meet our production/ dispatch estimates for FY14E as activity ramps up in H2FY14. However, we expect cost pressures to cap profitability over FY14E/FY15E. Maintain our TP of Rs 295, but downgrade the stock to HOLD on limited upside potential from current levels.

Production beats estimates: COAL's Sep'13 production stood at 33.2mt (+15% YoY), aided by capacity ramp-ups at Mahanadi Coal (MCL) and Northern Coal (NCL) fields. For H1FY14, production was at 220.5mt (+4.7% YoY). Our current estimates factor in production growth of 5% YoY at 474mt for FY14E. At current production levels, the asking growth rate for H2 is 5.5%, implying production of 274mt in this period.

Strong growth in dispatches: Dispatches for Sep'13 came in at 35.8mt, up 10% YoY, and that for H1FY14 at 224.4mt, a 4.5% increase YoY. The H2FY14 asking rate for dispatch growth thus stands at 6.9% YoY. Channel checks suggest that rake availability to COAL is likely to increase meaningfully in H2FY14, which would help the company achieve its FY14E dispatch target of 492mt.

E-auction prices continue to weaken: E-auction volumes stood at 19.6mt during Apr- Aug'13, up 20.1% YoY. However, e-auction prices for Aug'13 were at Rs 2168/ton, down 19.3% YoY and 0.4% MoM. The YTD weighted average e-auction prices were at Rs 2232/ton, down 15.8% YoY during Apr-Aug'13. While e-auction volumes remain higher than our estimates, e-auction prices are likely to end lower than our FY14E estimates.

Valuation: We value the E-auction/utility businesses at 5x/8x EV/EBITDA to arrive at our Mar'14 TP of Rs 295/share. Downgrade to HOLD on limited upside.

Source : Equity Bulls

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