MOSL: COAL INDIA (Buy)-Cost saving and other operating income driving upgrades- Raising target price
​coal india: Cost saving and other operating income driving upgrades; Raising target price; Reiterating Buy
(COAL IN, Mkt Cap USD24.5b, CMP INR253, TP INR305, 21% Upside, Buy)
Volume growth accelerating; re-stocking to boost dispatches in 2HFY18
Coal demand growth has started accelerating. Coal India’s (COAL) dispatches grew 6.6% YoY to 225mt in 5MFY18 (v/s mere 1.6% growth in FY17), despite destocking of ~16mt YoY to 12mt by power plants. We believe power plants will need to restock by at least 14mt to 26mt by March 2018 for uninterrupted supply in 1HFY19, unlike destocking by 2mt between August 2016 and March 2017 to 26mt. With a steady increase in electricity generation and re-stocking, we believe COAL is on track to achieve dispatch growth estimate of 6.8% (to 580mt) in FY18.
Increasing revenue from other operating activities
COAL has increased the sizing, rapid loading and slack/steam coal charges, which will generate additional annual revenue of INR5.3b. We understand that COAL is also considering increasing transportation and loading charges to offset the revenue loss on account of grade correction.
Closing of unviable and unground mines to drive significant cost saving
There is a strong focus on reducing cost of production. Underground mines (UGM) have high operating cost due to manual operations. UGMs employ nearly 55% of COAL’s manpower, but account for just ~6% production. The loss from the 177 UGMs is more than COAL’s profit in FY17. Unviable UGMs are being closed gradually. 19 UGMs were closed in FY17 and 12 until 5MFY18. The target is to close additional 25 UGMs in FY18, followed by another 38 in FY19.
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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