Buy Coal India; target of Rs 394: SPA Research

SPA's reserach report on Coal IndiaCoal India's Q2FY16 results came inline with estimates with topline growing by 8.2% YoY to INR 175 bn whereas bottomline clocked in growth of 16.2% to INR 25 bn. While the coal production grew by 5.6% YoY to 108 mn tons, coal off-take grew by 13.5% to 125 mn tonnes. Other income declined 5.5% INR 15 bn. CIL will have to invest ~INR 35 bn to reach its 1 bn ton p.a. coal production target by 2020. While this might reduce other income in the near term, the company will generate much more return on the invested amount (~23-25% EBITDA and improvement in return ratios). We retain our Buy recommendation on the stock with a revised target price of INR 394 (Previous- INR 456) as we factor in Coal India's inability to implement price hikes.GoI's annual target of 1 bn tonne coal production from Coal India by 2020 is achievable only if required evacuation infrastructure is set up. Coal India, in coordination with the Central & State governments, is successfully resolving key issues in coal production, which can be seen from 6.9% & 9.1% growth in coal production in FY15 & YTD respectively (Avg. 1.8% CAGR between FY11-14). While these measures will result in topline growth, CIL must keep its cost in check to maintain profitability. We expect FY17 Coal production & Offtake of 577 mn tonnes (8.0% CAGR FY15-17E) and 598 mn tonnes (10.7% CAGR) respectively. Topline & bottomline is expected to grow at a CAGR of 7.8% & 12.8% between FY15-17E. We retain our Buy recommendation on the stock with a revised target price of INR 394 based on 15x FY17E earnings (Previous- INR 456). For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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