Sharp coal production and despatch growth in May’18
Reason for report: Company update
* Coal despatch and production growth for the month of May’18 jumped 13.9% YoY (to 52.9mnte vs 46.4mnte in May’17) and 15.7% YoY (to 47.1mnte vs 40.7mnte in May’17), respectively.
* Corresponding increase in thermal power generation was 5.4% YoY (30 days’ data extrapolated to 31 days), driving 221bps improvement in PLFs (from 56% in May’17 to 58.2% in May’18).
* CEA data highlights stable coal inventory at power plants (10 days): Stable coal inventory at power plans, despite sharp increase in despatches indicates –
* Increase in coal consumption at thermal power plants
* Robust demand from non-power sector, coal supply to which is now being deprioritised, to ensure adequate coal availability for power sector
* Important to note that CEA’s daily coal report covers 140GW of coal-fired capacity – 71% of all India installed coal-fired capacity of 197GW, not capturing the coal inventory data of as much as 57GW capacity
* Overall power generation growth (for 30 days of May’18, extrapolated to 31 days), though better than 0.3% YoY in Apr’18, was rather timid at 3.5% YoY – lower than the 6.9% demand growth witnessed in FY18.
* With the impending mining disruption due to onset of monsoon, utilities are likely to stock up coal reserves to meet increased power demand, as lower YoY snowfall is expected to result in weaker hydro generation this year. As per CEA’s latest report, 25 power plants have critical coal inventory levels. Logistical constraints permitting, expect increased coal despatches to these power plants.
* Coal India (CIL) likely to benefit from favourable demand supply scenario: We believe favourable demand-supply scenario will benefit CIL, helping drive volume growth while ensuring elevated e-auction premiums. Company will also gain from recent price hike and imposition of evacuation facility surcharge and various cost savings from lower leave encashments, actuarial revaluation of retirement liabilities (precipitated by increase in G-Sec yields), employee retirements and overtime reduction. Maintain BUY with an unchanged target price of Rs368/share, with a strong FY20E dividend yield of 7% acting as downside protection. We have factored the dividend yield while determining our recommendation. Key downside risks: 1) weakness in power demand leading to lower volumes, 2) weakness in international coal prices (impacting sentiment and making imported coal more competitive vs domestic coal), and 3) lower than expected e-auction demand volumes and realisations.
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