MOSL: COAL INDIA (Buy)-Concerns largely priced in-Volume growth accelerating-TP revised to INR275-Buy
​Coal India: Concerns largely priced in; Volume growth accelerating; TP revised to INR275; Buy
(COAL IN, Mkt Cap USD22.9b, CMP INR237, TP INR275, 16% Upside, Buy)
We attended Coal India's (COAL) 1QFY18 analyst meet. Key takeaways:
1Q reflects full impact of grade slippage
FSA realization declined INR37/t YoY to INR1,201/t in 1QFY18 due to the sale of old inventory (which has lost some GCV) and the full impact of re-grading of mines. COAL de-stocked ~18mt in 1Q, highest in a quarter. Mines would be graded every six months, with potential for even an upward revision. Incentive income is unlikely going ahead (~INR7b in FY17) due to clubbing of linkages. We cut FSA realization by INR43/t to INR1,233/t due to grade slippages and no incentive income.
Demand growth accelerating as power plants re-stock
Dispatches in the first 15 days of August increased ~18% YoY, representing a pick-up from growth of ~7% in July 2017 and ~3% in 1Q. YTD up to mid-August, dispatches rose 5.4% YoY, inching toward our estimate of 6.8% growth in FY18. Demand pick-up is driven by re-stocking by power plants and growth in electricity generation. Production has grown at ~22% in the first 15 days of August.
Executive wage negotiation done; VRS and mine closures can drive savings
The wage negotiation with executives was concluded, settling for a hike of 15%. Non-executive wage negotiations are still ongoing, but considering inflation and higher base, we believe there is scope for the hike to be below our estimate of ~18%. Natural attrition, VRS offer and cut in overtime will limit inflation in employee cost. It would also close 37 unprofitable unground mines to reduce cost.
Coal India is engaged in the identification, exploration, and production of coal in India. Co. offers coking coal primarily for use in steel making and metallurgical industries, and for hard coke manufacturing; semi coking coal for use as blend-able coal in steel making, merchant coke manufacturing, and other metallurgical industries; NLW coking coal for use in power utilities and non-core sector consumers; non-coking coal for use as thermal grade coal for power generation, as well as for cement, fertilizer, glass, ceramic, paper, chemical and brick manufacturing, and for other heating applications.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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