MOSL: Coal India - Volume growth challenges persist - Clearances - Land acquisition - Evacuation
Motilal Oswal Securities Ltd.
31 Mar 2014
Available for Immediate Download
COAL INDIA: Volume growth challenges persist - Clearances I Land acquisition I Evacuation (COAL IN, Mkt Cap USD28.1b, CMP INR286, TP INR292, 2% Upside, NEUTRAL) Volume growth challenges persist. Post our meeting with Coal Indias (COAL) senior management, we understand that clearances, land acquisition and evacuation issues still remain key hurdles. Production of 550m-560m tons is feasible by FY17. Price hike benefit is eroded by grade slippages and old inventory liquidation; a review is likely in 1HFY15. Moderate cost pressure would remain. Debtor recovery has improved in FY14. Capex is pegged at INR50b per year for the next 2-3 years. Normalized dividend payout would be 55-60%. FY14 growth muted, FY15 target looks optimistic: For 11MFY14, production/dispatch growth was 2.8%/1.7% YoY, marred by lack of clearances, short-supply of explosives, poor demand from DISCOMs, climatic conditions, etc. The target of 42m ton production growth by FY15 appears optimistic in our view, given COALs track record (FY10-14E CAGR of 2%) and several issues even for brownfield projects. If land acquisition is brought under the purview of LARR (Land Acquisition Rehabilitation and Resettlement Act), it could pose yet another challenge. Currently, land acquisition by COAL is covered under the Coal Bearing Area Acquisition Act (CBA). Progress on critical railway lines is slow and possible benefit in the 12th plan period would be low. Pricing gain eroded; review possible in FY15: Benefit of price hike taken by COAL in May 2013 (potential benefit of INR20b in FY14) has been muted due to grade slippages (~2%) and old stock liquidation. Realization is likely to be strong in 4QFY14, as 3Q realization grew 3.4% YoY despite such slippages. While focus remains on driving profitability through volume growth and cost efficiency, prices may be reviewed post elections and as full impact of grading is visible. Debtor recovery high; capex looking up: Debtor recovery has improved in FY14 owing to cash-ncarry concept, as also the commitment by a key customer to resolve payment issues. On the capex front, COAL has been contending with land acquisition challenges. FY14 would, however, see capex of INR40b and the target for the next 2-3 years is INR50b per year. Earnings CAGR muted; yield provides downside comfort: We cut our FY14 volume estimate by 5-7m tons. We now expect COAL to report earnings CAGR of 1% over FY13-15 (FY15E earning growth being 6.6%). 5% dividend yield provides downside comfort. However, possible challenges in volume growth and lack of earnings drivers may limit upside. Maintain Neutral.