The Coal India Ltd surprised the market by declaring a dividend of Rs 29 per share against the expectation of Rs 14-20. This has validated our view of buying without waiting for the FPO. The disinvestment overhang is behind us and the market will likely focus on fundamentals such as price hikes, volume growth and the easing of regulatory bottlenecks. We adjust our numbers to reflect higher dividend and our new target price of Rs 353 (ex dividend) is based on 12x PER. The valuation, at 8x PER FY15E (OBR adj), is attractive. Maintain outperform.
The board has declared an interim (not special) dividend of Rs 29 per share. Coal India will still end FY14 with a cash balance of R86/share, 33% of the adjusted market cap. We have assumed 50% payout ratio, but Coal India will remain the main source for the cash-strapped government and the payout could be higher.
The management is determined to keep operating margins close to 30% and we expect the effect of these hikes to reflect in 2H14 margins.
Following faster decision-making at the environment ministry, Coal India thinks it can easily boost output by 30-40 mt.
We estimate a 40% rise in demand for coal under e-auction volume in FY15. This can lead to a recovery in e-auction coal price, from R2,200/t to the R2,800/t seen in FY13, posing upside risks to our 3% above- consensus FY15e EPS.
We cut our EPS estimates by 6-9% for FY14-16 factoring lower ?other income? and volume and target price from R360 to Rs 353 at 12x PER FY15E.
