* Coal India (CIL) has changed its pricing policy and has rationalized prices across grades, resulting in an average price hike of c. 9%. This is expected to increase revenue by Rs64bn annually (Rs19.5bn for remaining part of FY18).
* This move will fully offset the adverse impact of wage revision. However, post the price hike, Coal prices (ex-inland transportation cost) are still 50-60% cheaper compared to imports. Also, e-auction prices are likely to improve.
* Most of the concerns like: grade slippage, e-auction price decline, lower volume growth and wage hikes have abated. We expect business performance to improve with a pick-up in power demand.
* Dividend yield at 6-7% is attractive. We expect dispatches to grow by 5% in FY19, eauction price to improve and FSA to remain stable. Accordingly, we upgrade our recommendation to BUY with a revised TP of Rs359.
Major concerns recede
CIL has changed it pricing policy for non-coking coal in line with global practice. Coal price will now be based on per unit of Calorific value (Rs/Kcal) instead of band based pricing system from April 1, 2018 onwards. This will improve transparency to customers in pricing. Prices have been increased as follows: G6‐G7: 20‐22% for power sector and 10‐21% for non‐power sector; G11‐G14: 13‐18% for both power and non-power sectors; G8‐G9: 3‐5% for both power and non‐power sectors. Even after the recent price hike, CIL’s prices (ex-inland transportation cost) are 50-60% cheaper compared to imports.
With the rise in prices, which will fully offset the impact of wage revision, we believe that all the major concerns for CIL like: grade slippage, e-auction price decline, deceleration in volume growth and wage hikes have now subsided. Going forward, volume growth will catch up on the back of the pick-up in power demand. Also, various cost-control initiatives being undertaken by the CIL management like: closure of underground mines, voluntary retirement schemes, overtime compensation etc will help it in achieving a better operating performance going forward.
Stable business; 6-7% dividend yield is alluring
After incorporating the price hike, we have upgraded our EBITDA/EPS estimates by 24%/21% for FY19E. We have upgraded our target multiple to 8x FY19E EV/EBITDA. Accordingly, we have upgraded our rating to BUY with a revised TP of Rs359 (16% upside), which implies total return of~22-23% with a dividend yield of 6-7%. Stock is currently trading at 8x FY19E EV/EBITDA and 10x FY19E P/E.
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