20 August 2015
Update | Sector: Utilities
TP: INR439 (+25%)
Share of higher margin volumes to rise sharply
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap.(INR b)/(USD b)
Free float (%)
Lower e-auction prices to spur import substitution
Financial Snapshot (INR Billion)
2015 2016E 2017E
720.1 766.0 904.1
EPS Gr. (%)
Div. Yield (%)
152.3 162.6 201.3
137.3 148.1 174.8
Coal India (COAL) is delivering impressive double-digit production growth,
pleasantly surprising consumers.
E-auction supplies have jumped, affecting realizations in recent months. We
continue to believe that e-auction realizations would soften, and cut our
realization estimate for FY18 by INR270/ton to INR1,849/ton. This should be the
Growth in coal demand from power utilities is slowing. We have reworked our
demand-supply model to factor slower growth in demand from the power sector.
This results in a 103m-ton swing in volumes to the higher margin non-power
segment. The share of market-linked non-power volumes is likely to increase
from 21% in FY15 to 32% in FY20. Imports of thermal coal would remain high at
158m tons (earlier 246m tons).
We have increased cost of mining to factor higher strip ratio. Lower diesel prices
and technologically superior explosives would reduce specific costs. COAL should
benefit from operating leverage, as production accelerates.
We expect earnings growth momentum to continue, notwithstanding lower e-
auction prices, as COAL keeps its focus on production growth. We have cut our
earnings estimates marginally, and our target price from INR450 to INR439. The
stock is trading at 6.4x FY17E EV/adjusted EBITDA. Dividend yield is attractive at
5-6%. Reiterate Buy.
Double-digit production growth pleasantly surprises consumers
Shareholding pattern (%)
Jun-15 Mar-15 Jun-14
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
After years of disappointments in production growth, the recent double-
digit growth in coal production has pleasantly surprised consumers. As
more volumes became available for e-auction at a time when consumers
had booked alternate supplies (imports), e-auction prices fell sharply.
We understand that e-auction prices are now 20-25% cheaper in value
terms as compared to imports. We expect e-auction prices to recover
gradually during the year.
Bottom of pit e-auction realization is INR1,849/ton
We had expected e-auction prices to soften ~14% to INR2,119/ton on
growth in domestic supply and weaker international prices. The global
demand outlook has weakened further in recent months, putting more
pressure on RB Index (NAR of 6000kcal/ton); the INR too has depreciated
against the USD. We are changing our global thermal coal price assumption
to USD55/ton (earlier USD60/ton) for FY17 and USD50/ton, thereafter. Our
e-auction realization estimates are now INR2,041/ton (earlier INR2,059) for
FY16, NR2,007/ton (earlier INR2,119) for FY17, and INR1,849/ton (earlier
INR2,119) for FY18.
(SanjayJain@MotilalOswal.com);+9122 3982 5412/Nalin
(NalinBhatt@MotilalOswal.com) +9122 3982 5429
(Dhruv.Muchhal@MotilalOswal.com); +9122 3027 8033
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