Kotak Institutional Equities: Maintain ‘buy’ on CIL with fair value of Rs 285/share
Coal India reported 20% y-o-y decline in dispatches in September 2019 due to flooding of mines on account of excessive rains. Production volumes traced dispatch numbers and declined by 23.5% yoy in September 2019. E-auction premiums increased to 87% in August 2019 even as inventory across plants declined with four units reporting critical inventory of coal. Maintain BUY rating with fair value of Rs 285 on an improved earnings trajectory and attractive valuations (6X P/E on FY2021E adjusted earnings).
Coal India reported a decline of 20% yoy with dispatch volumes of 35.2 mn tons in September 2019—the fifth consecutive month of weak dispatches. Dispatch volumes in 1HFY20 at 275.8 mn tons have declined 5.2% YTD. CIL volumes in 2QFY20 were at 122.5 mn tons, a decline of 11% yoy. We note that dispatch volumes have remained sub-5% for 11 out of 12 months since September 2018 in comparison to 5.2% CAGR in volumes achieved by CIL over the past five years. Production in September 2019 was at 30.8 mn tons, showing a decline of 23.5% yoy due to flooding of mines on account of heavy rainfall during the month. Among subsidiaries, WCL and MCL showed the highest decline in dispatches at 40% yoy and 32% yoy, respectively while larger subsidiaries SECL and NCL reported decline of 21.5% yoy and 2.6% yoy, respectively. On the production front, all subsidiaries saw a decline in volumes with WCL reporting the highest decline of 43.5% yoy followed by MCL at 33.3% yoy in September 2019.
E-auction premiums improved to 87% in August 2019 from 62% in July 2019. We highlight even as e-auction premiums have improved in two months, e-auction volumes remain weak. We note e-auction sales were down 35.5% yoy in FY19, along with overall e-auction revenues dipping by 8% yoy even as e-auction realisations rose 43% yoy in FY19. Coal inventory across units in India too dipped to 11 days with two units each in North and West having critical inventory.
Valuations for Coal India remain attractive at 6X P/E and 4.6X EV/EBITDA on core earnings for FY2021E and an attractive dividend yield of 12.5%. We note that attractive valuations, and moderated earnings expectation aside, stock performance has been hit by aggressive disinvestment targets that may likely rise with the lowered corporate tax revenues.