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JMFL
Coal India (Buy)
CMP: ₹235
Target: ₹350
Coal India’s (CIL) offtake grew at 5.5 per cent in YTD FY19 versus.6.9 per cent in FY18 depressed mainly by flattish growth in 3QFY19. However, coal stocks in power plants have improved to 10 days in December from seven days in October driven by a) power demand growth reverting to normalised 5-6 per cent after the spike seen in October 2018; and b) imported coal stock at plants doubling to (c.0.6 MT in December versus October). However, given stable power demand growth and coal stock at plants at only 10 days (versus 21days mandate) — we expect the coal offtake growth to continue as power plants continue re-stocking coal in FY19-20.
Key challenges: Logistical constraints continue as CIL loaded an average of 187/202 rakes per day in 2QFY19/ 1HFY19 versus a requirement of 280-300 rakes/day. Moreover of the under-development railways corridors, two are expected to commission in CY18 (Tori- Balumath and Jharsuguda-Barparlli-Sardega), while the Mand-Raigarh line is expected only by end-CY19.
The volume pick-up, coupled with a price hike to offset the wage hike impact, augurs well for earnings growth. At the CMP, we find the risk-reward to be favourable and we maintain a ‘buy’ rating from a long-term perspective with a DCF-based TP of ₹350 (implied FY20 P/E of 14x).
Key risk to our call: Lower than expected production/ offtake growth.
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