Coal India - At inflexion point - IIFL

The overhang of Government's Follow on Public Offer (FPO), the Presidential directive to sign FSAs with power producers and lower market linked prices have resulted in Coal India underperforming the indices over the last one year. We believe the impact of the above is already factored in the underperformance of the stock. Realisations under e-auction sales and washed coal sales are near their bottom, and any increase in global coal prices would lead to higher realisations for CIL. The recent price hikes announced by the company indicates its ability to pass on the increased costs to maintain profitability. With a dividend yield of 4.9% (dividend expected to increase yoy), downside for the stock would be limited. Earnings are expected to improve FY15 onwards on the back of higher volumes, marginal increase in e-auction prices and price hikes taken by the company during the year. At the CMP, company trades at 5.2x FY15 EV/EBIDTA, lower than its historical average of 7.8x. We value the company at 6.5x FY15 EV/EBIDTA and arrive at a price target of Rs323.

Recent price hikes to offset cost increase

CIL has witnessed an increase in costs due to the deregulation of diesel and an increase in employee costs. To mitigate the increase in costs, CIL over the last one year has announced price rationalization exercises, thereby protecting margins. On account of the price hikes and an increase in volumes, we expect EBIDTA/ton to increase from Rs318/ton in FY14 to Rs377/ton in FY15. The hike indicates CIL's ability to increase prices to protect its margins and contradicts the markets' reservations about its pricing power.

Offtake growth expected at 3% yoy in FY14E

Coal India managed to produce 274.7mn tons (+3.7% yoy) and offtake stood at 298.6mn tons (2% yoy) for the period April-November '13. This is below management guidance due to few one-offs like high temperature in Q1 FY14 and Cyclone Phailin in Q3 FY14. We expect CIL to end the year with a production volume growth of 3.9% yoy and an offtake volume growth of 3% yoy to 480mn tons. We estimate production growth to pick up on the back of commissioning of new mines from H2 FY15.

Source : Equity Bulls

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