Rising output to bring respite to Coal India

Higher output could ease concerns over lower e-auction volumes

 

Coal India’s (CIL) double-digit growth in production and offtake for a second month in a row are heartening. After a tepid volume growth of 2.4 per cent in the first half of FY15, the October figures provided respite as production and offtake at 40.2 million tonnes (mt) and 39.1 mt, respectively, were up 15 per cent and 10 per cent year-on-year (y-o-y). The November figures have enthused further confidence, with production and off-take going up 13.3 per cent and 7.2 per cent y-o-y at 44.4 mt and 41.6 mt, respectively. These were driven by a 14-30 per cent y-o-y output growth at the firm’s mines in Odisha, West Bengal and Jharkhand, say analysts.

This eases some concerns on volume growth and profitability. Higher production is necessary to boost e-auction volumes that are more profitable. The fuel supply commitments had led to lower e-auctions, impacting CIL’s September quarter performance.

  While CIL aims for an offtake of 520 mt and production of 507 mt in FY15, the past two months have provided adequate boost. Nevertheless, Nomura analysts, looking at the run-rate, expect production and sales to touch 490 mt and 498 mt, respectively. The 311-mt production in FY15 (till November) means 94 per cent achievement of the targeted 330.16 mt offtake during this period.

Of late, the government has been aggressive on  boosting CIL’s production. It aims to double this to one billion tonnes annually by 2020, a compounded annual growth rate of 14.5 per cent. Even if 75-80 per cent of this target is met, it would mean a huge boost to performance.

The stock in the past few months has under-performed. This is due to tepid production growth, lower e-auction volumes, delay in price increases for coal to be supplied under supply agreements, and the government’s planned divestment. After touching a 52-week high of Rs 423.85 in June, it corrected 15 per cent and closed at Rs 360.15 on Wednesday.

Although some near-term overhangs remain, analysts are positive on CIL. At Goldman Sachs they expect an operational turnaround, given the government’s focus on raising production, giving a discounted cash flow-based 12-month target price of Rs 470. Analysts at Nomura also believe at the current levels, the stock offers returns of 29 per cent (including 4.5 per cent dividend yield). Their target price stands at Rs 443. Bloomberg’s consensus target price is Rs 377.