Buy Coal India; target of Rs 310: Edelweiss

Coal India's (CIL) Q2FY17 EBITDA, at INR7.4bn, came 73% below consensus mainly due to the decline in E-auction realisation and FSA volume. In near term, high coal stocks could exert pressure on E-auction prices and accordingly E-auction prices at 20-25% discount to landed cost of import will continue to result in lacklustre growth in realisation. Ergo, we have cut our FY17E/18E E-auction realisations and tempered our PAT forecasts by 12%/22%. But, we now value the coal business at 18x (earlier 16x) as entire output of coal in India is estimated to be sold at 25-30% discount to international prices. Also, at our revised TP of Rs 310 (Rs 351 earlier), we reckon CIL’s dividend yield of 9% (DPS of Rs 27.4/share) is attractive. Maintain ‘BUY’.

Building in the recent fall in E-auction prices and subdued Q2FY17 performance, we have pruned our FY17/18E PAT by 12%/22%. While we believe that the stock might be under pressure in near term impacted by the lacklustre Q2FY17 earnings, reasonable dividend yield of 9% will likely limit the fall in the stock price. At CMP, the stock is trading at 17.0x FY18E EPS, which is in line with global peers despite much lower realisations. Hence, we have ascribed higher target multiple of 18.0x (16.0x earlier), implying a revised target price of Rs 310 (earlier Rs 351). We maintain ‘BUY/SO’.