We retain our ‘hold’ rating on Coal India (CIL) and target price of R360 a share. We perceive downside risk to CIL’s volumes and margins if e-auction volumes fall by over 8 million tonne by FY16e.
We have assumed ~2% y-o-y price increase for FSA coal in FY15e, which may not materialise. At CMP, the stock trades at expensive valuation of 14.4x FY16e P/E.
We interacted with the ministry of railways to discuss possibilities of increase in CIL rail volume in the medium (three years till FY17) and long (beyond FY17) term. Up to FY17e, CIL’s rail volumes are not expected to grow beyond 25 million tonne per annum (mtpa), primarily due to production and land challenges. However, the ministry too admitted that no major freight capacity augmentation is under way in existing lines.
CIL is funding three new railway lines — in Jharkhand, Chhattisgarh and Odisha — to increase coal evacuation capacity by ~110 mtpa in phase I and by ~300 mtpa in phase II. While the ministry expects these lines to start between June 2016 (FY17) and June 2017 (FY18), in our view, the initial impact is possible only in FY18 considering chronic delays. Our channel checks also indicate that the government has asked CIL to divert 25mt e-auction coal to power producers (we have assumed 8-mt reduction by FY16). This will hurt the company’s profit. The government is not in favour of a price hike currently.