Edelweiss Finance' view on Coal India

Volume cheer in April; Buy

Our outlook on Coal India’s (CIL) volume surge is optimistic, particularly after it posted 6% plus YoY spurt in April 2017 (rose every month since November 2016, except February 2017).

Also, 5% YoY dip in production indicates potential reduction in inventory by ~10% to ~60mt in April 2017. We keep our estimates broadly unchanged.

Realigning our multiples to global peers, our revised target price comes to INR340/share (earlier INR360). Our target price also includes the possibility of INR20/share dividend for FY18E and FY19E. Maintain ‘BUY’.

April rush: Fifth month of volume jump; sustenance prospect bright

CIL’s volumes jumped 6% YoY to 45 mt in April 2017 compared to 2% YoY decline in April 2016. We expect the volume spurt to sustain as the company has reported 6% plus YoY growth for the fifth month since November 2016 led by 14% YoY and 11% YoY jump at major subsidiaries — South Eastern Coalfields (SECL) and Northern Coalfields (NCL), respectively. We anticipate further spurt in despatches as land acquisition issues at Mahanadi Coalfields (MCL) are sorted out.

Inventory drawdown an additional benefit

In contrast to off take spurt, CIL’s production volume declined ~5% YoY to 38 mt in April, implying ~7mt cut in inventory. We believe, this is the right strategy as it will prune the company’s inventory carrying cost, besides aiding maintain e-auction premium at the current ~20% level.

Outlook and valuations: Sustained volume growth; maintain ‘BUY’

We envisage CIL to benefit from the volume growth. Moreover, the company’s blended realisation is expected to improve with higher e-auction proportion in the product mix. The stock is trading at a 3-year low P/E (1-year forward) multiple.

We maintain ‘BUY/SO’ with a revised target price of INR340 (INR360 earlier), implying exit P/E of 14.2x FY19E, which is at the upper end of global peers (12.0-14.5x). Our estimates also include possibility of dividend payout of INR20/share each for FY18 and FY19.

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