Friday, April 08, 2016

Coal India Ltd: Buy
CMP: Rs.281.30
Edelweiss's research report on Coal India:
We met senior management of Coal India (CIL) to know more about the steps the company is taking to tackle the impending wage hike and meet its sales target, among other things. CIL is confident of mitigating effects of the impending wage hike and increase in clean energy cess. Further, it has maintained its production target of 598mn tonnes for FY17. CIL is targeting to reduce costs by 5% every year primarily through manpower cost rationalisation and enhancing operating and supply chain efficiencies. Our assumptions remain unchanged. We maintain ‘BUY’ with TP of INR376 (16x FY18E PE). 
We believe that the company would be able to maintain its margins in FY17E led by pass through of wage hikes and volume growth. We keep our assumptions unchanged for FY17E and FY18E. The stock is trading at 12.0x and 12.5x FY17E and FY18E EPS, respectively. Maintain 'BUY/SO' with target price of INR376.

Additional inputs from Live Mint: It’s worth noting that CIL declared an interim dividend for FY16 worth Rs.27.40 per share recently.

Nevertheless, what offers some hope is that demand from the power sector could improve as we enter the summer season. That in turn is likely to boost coal demand. “Central Electricity Authority data indicates 13-15GW (gigawatts) of annual power capacity addition based on domestic coal in FY17-19 period, which alone can drive 9-10% coal demand growth,” points out JM Financial Institutional Securities Ltd.

And then, about 50% of current coal imports is to offset the shortfall in domestic production, added the brokerage firm. “Barring seasonal anomalies we believe coal demand will keep growing structurally,” JM Financial said in a report. Needless to say, if that pans out, CIL will benefit.

Currently, one CIL share trades at about 11 times estimated earnings for FY17. While valuations seem to be factoring in most of the negatives, what are the triggers?

With dividend now behind us and a forthcoming wage hike in July, focus would shift to FSA (fuel supply agreement) volumes price hikes, said Bhaskar Basu of Jefferies India Pvt. Ltd. “While there is uncertainty around price hikes, we believe market is already factoring in no price hikes,” points out a Jefferies report on 3 April.

Accordingly, potential price hikes and news flow surrounding that will act as a trigger from a near-term perspective.

Having said that, slower-than-expected volume growth and lack of price hikes will pose downside risks to earnings estimates.
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