October 2017: Dispatch growth remains strong
Domestic shortage driving e-auction prices
Dispatches grew ~12% YoY in October, likely to exceed full-year estimate
* Coal India’s (COAL) dispatch growth remains strong, as it grew 12.2% YoY to 48.3mt in October 2017. YTD 7MFY18 dispatches are up 8.7% YoY (to 317mt), and are set to exceed our estimate of +6.8% growth for FY18. Coal inventories at power plants remain at critical levels (just ~6 days of consumption), which provides visibility of strong growth ahead.
* Production grew 6% YoY to 46.1mt. YTD 7MFY18 production increased 1.7% YoY to ~278mt.
* CCL, NCL and WCL delivered strong double-digit growth in dispatches. BCCL and ECL saw a decline, while MCL continues to struggle.
E-auction at INR2,397/t in September
* E-auction realization was healthy at INR2,397/t (-6% MoM) in September, but with some loss of volumes. Allocated quantity of ~5.7mt (+37% YoY/54% QoQ) was below the required annual run-rate (of ~110mt). Net benefit, however, should still be positive for COAL.
* Premium over notified prices at INR774/t was the highest since January 2015 due to domestic shortage.
Coal-based electricity generation moderates to ~3% YoY in October
* Domestic coal production rose 10.6% YoY to 47.5mt, while dispatches are estimated to have increased 14.9% YoY to 52.3mt in September 2017. Imports were down 7.7% YoY to 10.3mt in September, but the rate of decline against the last few months is moderating.
* We estimate coal demand growth of ~3% YoY to ~66mt in September. Demand by the power sector was strong at ~6% YoY (as per CEA), but was partly offset by weakness in non-power.
* Based on electricity generation data for the 28 days of October 2017, coalbased generation growth has moderated to ~3% YoY (6MFY18: +5.8% YoY).
Volume growth accelerating, concerns are behind; Buy
Concerns around grade slippage, e-auction price decline, deceleration in volume growth, and wage hike are now behind. Volume growth is accelerating, which will also drive operating leverage gains. Various cost initiatives like closing of underground mines, VRS, overtime compensation and others can drive upside to our estimates. The stock trades attractive at 7.3x FY19E EV/EBITDA and 5.4% dividend yield. The TP is INR335/sh. based on 8x FY19E EV/EBITDA. Buy.
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